Unpicking the 'simplified' R&D tax relief move for SMEs in Autumn Statement: Jenson Brook

It has been widely anticipated for some time that the RDEC and SME R&D tax relief schemes would be merged to provide a single set of qualifying rules to reduce the complexity with claiming research and development tax relief.

In the recent Autumn Statement, Chancellor Jeremy Hunt said he was “incredibly proud” of the country’s life sciences industry and to help support the sector and others like it was creating a simplified R&D tax relief, combining the existing R&D Expenditure Credit and SME schemes.

He added: “I will also reduce the rate at which loss-making companies are taxed within the merged scheme from 25 per cent to 19 per cent and lower the threshold for the additional support for R&D intensive loss-making SMEs that I announced in Spring, to 30 per cent, benefiting a further 5,000 SMEs.”

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While on paper it makes sense, the detail could provide a different picture for business.

Chancellor of the Exchequer Jeremy Hunt recently delivered the Autumn Statement (Photo by Leon Neal/Getty Images)Chancellor of the Exchequer Jeremy Hunt recently delivered the Autumn Statement (Photo by Leon Neal/Getty Images)
Chancellor of the Exchequer Jeremy Hunt recently delivered the Autumn Statement (Photo by Leon Neal/Getty Images)

So there have been several changes to the Research and Development tax scheme aimed at simplifying and improving the process for business.

The first was to merge the current schemes into one.

Effective from April 1, this new scheme will provide an above-the-line credit (taxable income on receiving the benefit) with relief at the current Research and Development expenditure credit (RDEC) rate of 20 per cent.

So, loss-making businesses will receive 16.2 per cent net benefit and those profit-making will receive 15 per cent net benefit.

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The difference in the net benefits for loss-making and profit-making companies is down to the notional tax rate applied to the RDEC will be set at the small profits rate of 19 per cent, as opposed to the main rate of 25 per cent.

This means that loss-making companies will receive 16.2p for every £1 of qualifying spend, while profitable companies will continue to receive 15p of every £1 of qualifying spend.

Clearer guidance has been provided for claiming contracted-out R&D spend, with the company making the decisions and bearing the risks claiming the relief, aligning the incentives with those driving the innovation.

Finally, a welcomed new scheme will be introduced for SME businesses that are R&D incentive.

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The SME tax credit rate will be set at 14 per cent, and the R&D intensity threshold will be reduced from 40 per cent to 30 per cent for accounting periods beginning on or after April 1, 2024 to support SMEs heavily invested in R&D.

While those working in the financial sector can see the ambition of the changes, to simplify the process, it must be somewhat baffling for those that are not accounting or tax experts.

The introduction of the changes has already raised concerns about the complexity and uncertainty for businesses, not least when we look at the differing tax and credit rates for profit and loss-making companies.

Then there is the inclusion and exclusion of certain cost categories and the continued relevant of the SME definition amidst the new R&D intensive company rules that add layers of complexity to the process.

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Fundamentally, the best advice that we can give to businesses, and particular to those that are looking to access R&D to support to scale-up plans and progression, would be to speak with an expert that can explain clearly how the process works and what you can expect to receive from any R&D claims that are made.

Jenson Brook is Managing Director of Novus Capital