Autumn Statement 2023: life sciences businesses to benefit from R&D tax changes

Corporate tax expert Penny Simmons of Pinsent Masons said that the reduction would be welcomed by small R&D focused businesses, “particularly start-ups and notably those in the life sciences sector”. An enhanced 27% tax credit will be available to small or medium enterprises (SMEs) that spend 30% of total expenditure on qualifying R&D.

“There had been concern that the 40% rate was a significant hurdle to overcome and that many seemingly R&D intensive businesses would fail to qualify for the enhanced tax relief that is available to SMEs which spend significant sums on R&D. It will be hoped that a 30% threshold will be more attainable for a greater number of R&D businesses,” Simmons said.

Loss-making R&D intensive SMEs can claim an enhanced tax credit of 27% on qualifying R&D expenditure.  A repayable cash credit rate of 14.5% may also be available to eligible loss-making companies. The reduced 30% threshold will apply from 1 April 2024. The government has said that reducing the threshold will allow an extra 5000 SMEs to qualify for enhanced tax relief.

The government has also announced a one-year grace period for companies that dip under the 30% threshold so that they continue to be eligible for enhanced relief for one year, which Simmons said would “increase certainty” for those businesses.

The enhanced tax credit for R&D intensive SMEs was introduced in April 2023 following announcements at the Spring Budget.

The chancellor also confirmed that the government will proceed with plans to create a new simplified R&D scheme that will merge the two current schemes. According to the government, the new scheme will be a significant tax simplification, with a single set of qualifying rules. The new scheme will be introduced for accounting periods beginning on or after 1 April 2024.

Simmons said: “There will likely be concern that the government has not shifted significantly from a start date of April 2024. It is welcome that rather than applying to expenditure incurred from April 2024, the new scheme now applies for accounting periods starting from 1 April, which will buy some businesses more time to use the old rules depending on when their accounting periods start or end. However, with only four months until the new scheme bites in some form, the proposed implementation date is still too ambitious and gives businesses very little time to prepare, particularly since we haven’t seen finalised legislation or guidance from HMRC.”

The proposed new scheme is based on the existing Research and Development Expenditure Credit (RDEC) and will provide a 20% tax credit for qualifying R&D costs for eligible companies. The merged scheme will incorporate the new restriction on claiming tax relief for overseas R&D that is being introduced from April 2024. Draft legislation was published in July following a consultation on the proposed new single scheme earlier this year.

The government also confirmed that it has now concluded its review into R&D tax reliefs that was launched in spring 2021.

“Whether the new proposed new scheme will deliver an improved R&D tax system that will incentivise and boost UK R&D investment will depend on the precise wording of the legislation – as is so often the case with tax – the devil is in the detail and without the detail it’s difficult to assess the likely impact of the new regime with any certainty,” said Simmons. “A rushed timetable also creates the risk that the final legislation will contain unintended errors that will need to be corrected in the future – all of which creates unwanted uncertainty for businesses.”

Two UK tax reliefs are currently available on qualifying R&D related costs. Where certain conditions are met, relief is available for SMEs by way of an additional deduction of 86% on R&D costs. Loss-making SMEs may also be able to claim a cash repayment of the tax credit in return for surrendering R&D related losses – this is capped at 10%. The existing RDEC of 20% is primarily targeted at larger companies.