The Chancellor, Jeremy Hunt, has unveiled reforms targeting business and innovation policies, aiming to stimulate economic growth. A key reform involves the consolidation of various tax relief schemes for Research and Development (R&D) businesses.
These schemes currently offer Corporation Tax relief on eligible expenses, helping to lessen the financial load of capital investment and fostering growth.
However, recent changes have caused uncertainty for many businesses, especially small and medium-sized enterprises (SMEs), regarding their future claims.
What are the changes?
Previously, R&D businesses could apply for tax relief through two distinct schemes: the R&D Expenditure Credit (RDEC) and the SME relief, each with its own criteria. The new regulations, however, will merge these into a single scheme from 1 April 2024.
This unified scheme will allow all eligible businesses to claim a 20 per cent relief on qualifying R&D expenses, irrespective of their size or turnover. Additionally, the notional tax rate for loss-making companies will drop from 25 per cent to 19 per cent in April 2024.
The merged scheme also supports firms with limited capital to outsource their R&D, allowing tax relief claims on most outsourced R&D contracts to UK companies. Notably, the new scheme does not reduce relief for companies receiving grant funding for their R&D costs.
Who will be affected?
All businesses currently claiming R&D tax relief under either of the old schemes are likely to be impacted. To be eligible for this credit, businesses must seek advancements in their field, attempt to resolve scientific or technical uncertainties, tackle problems not easily solvable by professionals in the field, and claim relief on projects related to their trade.
Besides the merger, SMEs spending at least 30 per cent of their expenses on R&D can claim additional relief for periods after 1 April 2024.
How will future claims change?
The consolidation aims to streamline the R&D tax relief claiming process with a uniform set of rules. Its effect on future claims will vary based on whether a firm is a principal or subcontractor in an R&D agreement.
For principal firms, this streamlined process should incentivise R&D investment and enhance their R&D profiles.
It also eliminates the need for growing companies to switch between the SME and RDEC schemes, allowing them to expand without affecting their eligibility for R&D claims. However, subcontractors, currently benefitting from the existing schemes, might lose a significant incentive, as they can no longer claim relief on R&D expenses post-merger.
This could lead to a period of uncertainty and slower growth in the R&D sector, with potential renegotiations of outsourcing agreements. Firms might need professional guidance to navigate these changes without a transition period between the old and new schemes.
For tailored advice on how these changes will impact your business, please contact our expert team.
