This browser is not actively supported anymore. For the best passle experience, we strongly recommend you upgrade your browser.

Welcome to the European Tax Blog.

Some of Europe's brightest legal minds look at the tax issues across Europe which could impact multinational businesses.

| 6 minutes read

R&D Tax in the Autumn Statement 2023: A tale of two regimes

For those, like me, who have been following the ever-changing research and development (R&D) tax relief landscape in the UK over the past few years, it will have come as no surprise that the Chancellor, in his Autumn Statement 2023, delivered the final verdict on the future of R&D tax reliefs in the UK. By 1 April 2024, the UK will implement a merged R&D tax relief regime modelled on the existing research and development expenditure credit (also known as the RDEC).

HM Treasury, in its Summary of Responses document to the 2023 Consultation, published earlier this year (which I discussed here), warned that a final decision around whether to merge the R&D tax relief regime for small and medium enterprises (which I refer to as the SME Regime) with the RDEC (which is generally aimed at large companies, although some SMEs may claim under it) would be made at the next fiscal event. 

My blog posts over the past year (here and here) give a flavour of the policy motivations behind the decision to merge the SME Regime and the RDEC into a single regime modelled on the RDEC. In broad terms, there seemed to be growing discontent within HM Treasury around the levels of error and/or fraud within the SME Regime and frustration with the relatively poor value for taxpayer money of the SME Regime when compared to the RDEC. 

For SMEs, the Chancellor’s decision to move to a merged regime is one which will require engagement with an entirely new set of rules before 1 April 2024, which is when the new merged regime is expected to come into effect (despite calls from industry bodies and respondents to the 2023 Consultation that an implementation date of 1 April 2024 is too ambitious). Although, this may be an easier task for those SMEs who already make claims under the RDEC. For large companies, there will be an exercise in getting to grips with the new rules which come along with importing what were previously SME Regime concepts into the merged regime (although the framework of the relief available under the new merged regime should generally be the same as the RDEC – perhaps explaining why many large company respondents were generally upbeat in their responses to the 2023 Consultation). 

Below, I have picked up some of the features that caught my eye from the Autumn Statement 2023 policy documents. 

Subsidised Expenditure 

It has long been a feature of the SME Regime that, if expenditure is subsidised, it will not qualify for relief. This blanket restriction appears in section 1053 of the Corporation Tax Act 2009 (CTA 2009) (with section 1138 CTA 2009 making further provision for this restriction) and gave rise to one of the few pieces of case law in this area (Quinn (London) Ltd v HMRC). This same restriction did not appear in the RDEC because of a quirk of the EU State Aid rules. 

This restriction later appeared in the draft legislation published in July 2023 (in square brackets no less) intended to implement a new merged regime, under a newly proposed section 1042C CTA 2009. In effect, this imported what was previously an SME Regime concept into the merged regime, which would apply to large companies and SMEs alike from 1 April 2024. The Chancellor put this restriction to bed fairly quickly in the Autumn Statement 2023. In very short order, the proposed revisions to the draft legislation state that the rules restricting reliefs where part of the project expenditure has been subsidised have been removed. 

This will come as good news to taxpayers who may have been nervous about the restriction following Quinn (or, rather, HMRC’s interpretation of that restriction), in particular to those taxpayers who receive grant funding as part of their R&D activities. 

Contracted Out R&D

In relation to contracted out R&D, the position adopted for the merged regime (as was the case in the draft legislation) is that, where a party with a valid R&D project subcontracts said R&D to a third party, the party contracting out the work (referred to as the “decision maker” in the Technical Note) is the company which may claim under the merged regime in respect of the qualifying costs of that contract. The Technical Note then refers to certain circumstances where the contractor may claim for the costs instead, but those are benign circumstances where, for example, the work being done does not constitute R&D for the party contracting out the work in the first instance (and so it should come as no surprise that the party who has contracted out that work should not be able to make a claim under a merged regime intended to provide relief in respect of qualifying R&D expenditure).

The position around contracted out R&D has caused administrative difficulties and disagreements over interpretation between HMRC and taxpayers in the past. The Chartered Institute of Taxation made this same point in their public response to the draft legislation. There is unlikely to be a change in approach here. HM Treasury are acutely aware of the shortcomings and difficulties, but have decided to maintain it on the basis that such an approach “will result in more R&D getting relief”. 

Nominee Arrangements 

Whilst not an integral part of the merged regime, it is worth noting that rules will be introduced to ensure payments under the merged regime will be made directly to the taxpayer claimant(s) instead of a nominee of the taxpayer. The typical use of nominee arrangements arose in the context of agents or advisers who would process R&D tax relief claims on behalf of a taxpayer where the fee for that service would be a portion of the cash payment due from HMRC in respect of those claims (which would be more typical for SMEs rather than large companies). The mechanism facilitating that arrangement would be for the taxpayer to nominate the agent or adviser to receive the cash payment from HMRC in the first instance. The agent or adviser would then retain an amount representing their fee and pay the rest to the taxpayer. 

This measure is likely fuelled by HM Treasury’s view that some of the “boundary pushing” when it came to R&D tax relief claims was attributable to agents or advisers who provide R&D claims processing services. If the fee is directly proportional to the amount claimed under the R&D relief regime, there is an incentive to push what the legislation is intended to do, in the hopes of increasing the fee. This caused heartburn when HMRC came to revisit certain cash payments made under the R&D regimes because, at that point, the agent or adviser would have already been paid their fee – directly by HMRC, under the nominee arrangements, no less. Whilst the Autumn Statement 2023 policy documents admit that “most use of nominations is not associated with fraud” it does appear to be somewhat low-hanging fruit for HM Treasury to restrict their use more broadly given that a high proportion of fraudulent (or what HM Treasury has referred to as “fraud adjacent”) claims do use nominee bank accounts. 


I wrote in July 2023 that the draft legislation was a “death knell” for the SME Regime. Following the Autumn Statement 2023, it is probably more accurate to say that the SME Regime lives on, in part, in spirit as part of the new merged regime. Whilst the new merged regime is indeed modelled on the RDEC, there is no escaping that, for example, the new merged regime will borrow the PAYE and NICs caps from the SME Regime (which are more generous than the RDEC) or that loss-making companies are treated differently from profitable companies under the new merged regime by virtue of the notional rate of corporation tax applicable to loss-makers being 19% rather than 25% (which is reminiscent of the special treatment loss-making SMEs got in the SME Regime). 

It would be telling only half of the story to ignore the fact that, from 1 April 2024, SMEs which are ‘R&D intensive SMEs’ (meaning an SME whose R&D expenditure constitutes at least 30% of its total expenditure) may still access the SME Regime – an exclusive group of SMEs which HM Treasury expects will hit 5,000 by 2028-2029. 

As for concluding thoughts, it is slightly disappointing (though, again, not surprising) that the Chancellor did not take this opportunity to announce targeted or special rates of R&D tax relief for certain types of R&D expenditure (for example, expenditure which may contribute to the UK’s net zero targets). Whilst HM Treasury has given that proposal relatively cold treatment in previous consultation responses, it has never outright ruled out such a measure. Perhaps for now though, we focus on the task at hand, which is getting to grips with the face of the UK’s new R&D tax landscape. 


kmehmood, uk tax, r&d, slaughterandmay