2024 R & D Tax Incentive reforms

As we approach the beginning of FY 2024, [ 01 April 2024], writes MARIA KITT, PARTNER TAX INSIGHT UK, a number of key changes will take effect, building on the initial HM Treasury 2021 Consultation and outline ‘Corporation tax roadmap’ for innovative companies. The last part of these reforms focuses upon promoting inward RD investment, an achievement which at first sight seems at odds with global marketplaces and global science and technology breakthroughs. The rules on overseas subcontracting costs have reached their first stage – Consultation – in the legislative processes and can be looked at below together with a round up of FY 2024 tax impacts on R & D for UK companies.

At Spring Budget 2021, the government announced a review of the Research and Development (R&D) tax reliefs. The objectives were to ensure that the UK remained a competitive location for cutting edge research, that the R&D reliefs continued to be fit for purpose, and that taxpayer money was effectively used. The government concluded the review at Autumn Statement 2023 with the announcement  of the R&D merged scheme.

At Autumn Budget 2021, the Chancellor announced reforms to support modern research methods. They included expanding the R&D reliefs to cover  data and cloud costs, refocusing support towards innovation in the UK, and changes to target abuse and improve compliance. HMRC published draft guidance on the implementation of these reforms in December 2022. The government is grateful for the 63 responses received. Respondents included individuals, industry groups, businesses, accountants, agents and accountancy professional bodies.

At Spring Budget 2023, the government announced that the measures to refocus R&D relief on innovation in the UK will come into effect from 1 April 2024 instead of 1 April 2023. This allowed the government to consider the interaction between this and the design of a ‘universal’ / merged R&D relief, combining the current SME and RDEC reliefs into one 20% tax credit.

At Autumn Statement 2023, the government confirmed the introduction of the merged R&D expenditure credit and changes to the way contracted out R&D activities will be treated from 1 April 2024. The government confirmed that the overseas rules will apply from 1 April 2024 too. Legislation on the new merged R&D expenditure credit and the enhanced support for R&D intensive lossmaking Small and Medium Enterprises is included in the Finance Bill.

2024 Overseas expenditure by RD companies – measures deferred from 01/04/2023 –

The proposal is that for accounting periods beginning on or after 1 April 2023, for both the small or medium enterprise (SME) research and development (R&D) tax relief and the R&D Expenditure Credit (RDEC), to be qualifying expenditure, expenditure on payments to subcontractors is required to be UK expenditure, or to be qualifying overseas expenditure (CTA09/1138A). Further details can be read here,

https://www.gov.uk/government/consultations/draft-guidance-research-and-development-rd-tax-reliefs/research-and-development-rd-tax-reliefs-draft-guidance

The current state of this draft legislative proposal is ‘Evaluation’, with legislation to follow on.

M Kitt 20 March 2024