AUTUMN STATEMENT 2023

AUTUMN STATEMENT 2023

There were some important announcements made in the Autumn statement regarding the future of the R&D tax credits schemes both in structure, operation and who can benefit as well as wider investment in R&D in specific sectors. 

The major policy change, which was expected, is the intention to move to a single combined R&D scheme for the majority of companies claiming, large or small. This is intended to make sure the support is ‘fiscally sustainable’, meaning they are not growing in total claim value year on year.  This is intended as a simplification for accounting periods beginning on or after 1 April 2024 there will only be 2 R&D schemes available. There will be a second scheme which is specific to loss making SME R&D intensive companies:

• The merged scheme 
• SME intensive scheme 

THE MERGED SCHEME 

The objective of the R&D reliefs is to increase the overall levels of R&D in the UK economy to generate productivity growth by reducing the cost of investing in R&D. 

Following engagement over the summer, the government will legislate for the approach outlined below in the Autumn Statement Finance Bill 2023. 

It is important that the company making the decision to do the R&D and bearing the risk gets the relief. The government proposes adopting a position on subcontracting where the decision maker is allowed to claim for contracted out R&D. Where a company with a valid R&D project contracts a third party to undertake some of the (qualifying) work connected with their R&D project, the company may claim the relevant (qualifying) costs of that contract. The company contracted to do that work may not claim for R&D activities which delivers the project outcome for another company’s project. 

There is planned further discussions with industry to understand how a potential merged scheme could distinguish between ‘contracts for services’ and ‘contracted out R&D’ so that those undertaking qualifying R&D are able to claim relief, whilst avoiding double claims. 

Contracted R&D carried out by subcontractors who are working for non-UK corporation taxpayers, such as overseas companies, will continue to qualify for relief. 

Where a company is contracted to provide a product or service which is not R&D itself, such as constructing a building or a software product, if they undertake R&D in delivering that product or service, they would be able to claim relief even though they are undertaking R&D on an activity contracted to them. The exact details of who should claim the relief will depend on the specific contract. 

To ensure consistency across the regime, for accounting periods beginning on or after 1 April 2024 these rules will also apply to R&D intensive SMEs. 

SME INTENSIVE SCHEME 

The ‘SME intensive scheme’, for the most R&D intensive loss-making SMEs was announced at Spring Budget 2023 for R&D expenditure from 1 April 2023. As announced a company was considered R&D intensive where its qualifying R&D expenditure is 40% or more of its total expenditure. At the Autumn Statement the Chancellor has confirmed the threshold to be considered R&D intensive will be reduced from 40% to 30% of total expenditure, for accounting periods starting after 1 April 2024, allowing around 5,000 extra SMEs to qualify for an enhanced rate of relief. These changes will provide an additional £280 million of additional relief per year by 2028-29 to help drive innovation in the UK. 

Items of exceptional spending which might skew a SME’s intensity ratio for a year and lead to businesses moving into and out of the intensive SME regime creating uncertainty. To address this, the Government are introducing provisions to enable an intensive SME which has made a valid claim in the Intensive regime in one year to claim the intensive relief in year two. 

To protect the R&D intensive scheme for genuine loss-making R&D intensive companies, rules will be introduced to prevent businesses from manipulating their intensity by using short APs. 

The rate at which loss-making companies are taxed within the merged scheme will be reduced from 25% to 19%.

ADDITIONAL R&D CHANGES ANNOUNCED 

R&D claimants will no longer be able to nominate a third-party payee for R&D claims so R&D Tax Credits in future will only be paid directly to the claimant.  

As part of the government’s plans to support UK’s scientists and innovators to supercharge growth amongst SMEs and other organisations, which includes the following measures: 

• £750m in UK R&D this financial year having agreed Terms to associate to Horizon Europe and Copernicus. 
• £20m for a new cross-disciplinary proof-of-concept research funding scheme, to help prospective founders in the UK’s universities demonstrate the commercial potential of their research. 
• £121m for the UK’s space sector for new clusters and infrastructure 
• Continued support through legislation to extend the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) to 2035. 
• £50m additional investment through British Business Bank’s Future Fund: Breakthrough programme. 
• £4.5billion funding to unlock private investment starting in 2025/6 over five years, with £2B for automotive, £975m for aerospace, £520m for life sciences and £960m for green industries. 
• £500m additional investment in AI compute investments, further to the £900m announced in the Spring Budget 2023. 

TBAT INNOVATION View and Comments on the changes 

TBAT is cautious about a merged scheme, as there are some definite benefits in that SMEs will no longer get variable R&D benefits returns from 8% to 21% depending on profitability to a more consistent 15-16%. This provides increased certainty for planning R&D but the research-intensive companies will be getting back 27% of eligible. 

Tax and Accountant Agents will no longer be able to route tax claims through their escrow accounts, which is good, as that removes opportunities for rogue agents to manipulate clients.  

The major change is that of the R&D decision maker will be able to claim for sub-contracted R&D, benefiting large companies that will be able to claim their sub-contract R&D costs and stopping SMEs from claiming subsidised contracted R&D projects. This seems to skew the R&D benefit to larger companies but we understand the reasoning behind this. This will result in changes to contracts and the definition of services and R&D, though this is still being consulted on. Companies with grants and sub-contracted R&D from foreign companies will still be able to claim these subsidised projects.  

The reduction in the SME intensive scheme rate of 30% will benefit an estimated 5000 companies with the highest rate of benefit at 27% of eligible spend, which is good news.  

There is still a focus on reducing the high levels of non-compliance in the R&D reliefs with HMRC publishing a compliance actions plan in due course. In regard to this we hope that HMRC really do focus on rewarding the companies that are carrying out genuine R&D, rather than their current aggressive and hard-line approach in compliance checks.