On 18 July 2023, the government released a preliminary piece of legislation that introduces a consolidated Research & Development (R&D) framework, closely resembling the existing Research & Development Expenditure Credit (RDEC) program. Should this legislation be passed, all companies, regardless of their size, will be able to make claims under this unified scheme starting from 1 April 2024.
Although many small and medium-sized enterprises (SMEs) may appreciate the opportunity to present the R&D incentive as an above-the-line credit in their financial statements, there are significant discrepancies with the current RDEC scheme that could affect numerous claimants.
Additionally, the restrictions on overseas R&D expenses, which were expected after being postponed earlier in the year, will come into effect for expenses incurred on or after 1 April 2024. With only a few exceptions, expenditures related to overseas R&D will no longer qualify.
Integrated R&D tax relief program
The proposed draft legislation outlines the creation of a unified R&D tax relief scheme, with one exception for R&D-intensive SMEs. This scheme is designed to encompass all companies and would cover eligible R&D expenditures incurred from 1 April 2024 onwards, effectively phasing out the existing SME R&D tax relief program.
One noteworthy distinction from the existing RDEC scheme, as outlined in the draft legislation, pertains to the treatment of contracted out R&D expenses. The reforms seem to permit all companies, including large corporations, to make claims for expenses related to R&D activities that have been outsourced, regardless of the entity to which they are contracted.
This mirrors the rules in the current SME regime concerning outsourced R&D. Consequently, the draft legislation aims to prevent ‘double claims’ for the same activities, as companies will no longer be allowed to claim for expenses incurred on R&D activities they have subcontracted. These proposed rules on subcontracted R&D activities will determine who is eligible for R&D tax relief and are likely to be a subject of substantial debate.
As it stands, it appears that the company subcontracting R&D activities would be the one entitled to the incentives, rather than the broader R&D supply chain.
The draft legislation also seems to exclude expenditures on projects that have received ‘subsidies.’ This provision could significantly limit the availability of R&D tax relief for projects carried out under customer contracts and potentially those funded by other companies within the same group.
The UK government has explicitly acknowledged that this aspect of the draft legislation is being reviewed, and we anticipate that both this issue and the subcontracting rules mentioned earlier will generate numerous responses during the consultation process.
This is because of the potential impact on entities such as Contract Research Organisations, Tier 1 and 2 suppliers, and any claimants engaged in R&D activities at the request of their customers.
Enhanced relief for R&D-driven SMEs
Nonetheless, the draft legislation includes a provision for R&D-intensive SMEs, which will qualify for a higher rate of relief when they meet the ‘R&D intensity’ requirement.
In broad terms, this condition is satisfied when a company’s pertinent R&D expenditure accounts for at least 40 percent of the company’s total expenditure used in the calculation of its taxable profits.
This adjustment will become effective on 1 April 2023, permitting eligible claimants to access the SME payable credit at an elevated rate of 14.5 percent, instead of the standard 10 percent rate.
Limitations on foreign R&D expenditure
As expected, the previously proposed changes to overseas R&D expenditure, which were announced last year, have been reintroduced.
Consequently, the eligibility for claiming expenditures related to overseas R&D activities will be significantly restricted starting from 1 April 2024.
In line with the reforms introduced last year, expenses incurred on R&D activities conducted outside of the United Kingdom will generally not be eligible for claims, unless they fall under the category of ‘qualifying overseas expenditure.’
Overseas expenses may qualify if conducting R&D abroad is deemed ‘necessary’ due to geographical, environmental, or social conditions that are unique to the foreign location and not replicable in the UK. In cases where R&D is conducted overseas primarily for cost-saving reasons or because of the availability of specific skills, it will be explicitly excluded from qualifying as overseas R&D.
Additionally, there have been announcements regarding further reforms, including a more lenient version of the PAYE/NIC cap, as well as adjustments related to the going concern requirements for claimants and other consequential modifications.
Key considerations for claimant companies
Although the reforms are currently open for consultation, the mere existence of the draft legislation implies the government’s commitment to overhauling the R&D tax relief schemes.
It is prudent for claimants to assess how these reforms, as currently drafted, might impact their claims, especially considering the limitations on overseas R&D expenses, subcontracted R&D, and subsidized R&D activities.
Those claimants who anticipate adverse consequences may want to participate in the additional technical consultation, which has been announced in conjunction with the release of these reforms.
The deadline for providing feedback on the draft legislation is 12 September 2023.
Why Williamson & Croft?
Amid the impending alterations to the R&D tax relief regulations, your choice of an accountancy firm to oversee your R&D claim becomes crucial. Opting for Williamson & Croft ensures that you have a partner with a deep understanding of the forthcoming rule changes, setting us apart in the field of tax advisory.
Here’s why entrusting your R&D claim to us is a wise decision:
We possess profound expertise: Our experts have delved into the intricate details of the proposed R&D tax relief reforms. This in-depth knowledge allows us to skillfully guide you through the evolving landscape and optimise your claim within the new framework.
Custom-tailored strategies: We acknowledge that no two businesses are identical. Our approach is highly personalised, meaning we will collaborate closely with you to create a tax relief strategy that perfectly aligns with your unique R&D activities and business objectives.
Stringent compliance assurance: The changing dynamics of R&D tax relief necessitate meticulous compliance. Our firm is dedicated to ensuring that your claim not only leverages available incentives but also remains fully compliant with the incoming regulations.
Choosing Williamson & Croft as your partner ensures you navigate the evolving R&D tax relief landscape with confidence and assurance. Let’s take the first step toward optimising your R&D claim within the changing regulations. Contact us today to get started.