On 13th January, HM Treasury and HMRC published a consultation document that proposes moving to a single simplified R&D Tax Relief scheme from 1st April 2024.
This would replace both the current SME scheme and RDEC schemes (for large businesses or SMEs with grant-funded or subsidised projects). The full consultation document can be accessed on the UK Government website.
Reasons for the proposed changes
Changes to the SME and RDEC schemes were alluded to in the Autumn 2022 Statement and, therefore, come as no real surprise.
Part of the reasoning relates to the UK having two schemes while most other countries have just one. Other factors include the UK having one of the most generous R&D schemes, and spending a higher percentage of GDP than any other country in the OECD, but still seeing investment by UK businesses lagging behind other countries.
Another big factor is that additionality in the SME scheme is lower than in RDEC, incentivising as little as 60p to £1.28 of additional R&D spend for each pound spent, compared to as much as £2.70 additional spend per pound in RDEC.
There is also a perceived higher level of fraud and abuse in the SME scheme. HMRC estimates level to be at £430m for the SME scheme, compared to £39m with RDEC for the 2020/21 period.
The Government wants to ensure the UK remains a competitive location for cutting-edge research, and that the R&D Tax Reliefs are fit for purpose to support this, with tax-payer money effectively targeted to support innovation.
R&D Tax Reliefs are reducing from April 2023
As part of these measures, the Government has already announced a reduction in R&D tax reliefs from 1st April 2023. SME enhanced deduction is being reduced to 86% from 130%, and the tax credit rate will be reduced to 10.5% from 14.5%. RDEC, however, has increased from 13% to 20% and that gap between the schemes is already closing.
Businesses to get their say on future R&D Tax Relief legislation
The consultation sets out what the design of the scheme could look like, and is inviting comments from research and development-intensive businesses and their representatives to help shape the final proposal.
The Government will then decide whether to implement this and what the final rate within the fiscal cost envelope of R&D will be. It is hoped that the 20% RDEC rate will be increased to lower the impact this will have on SMEs.
The key differences between the SME and RDEC schemes
There are some key differences between the two schemes currently:
|
Feature |
SME Scheme |
RDEC Scheme |
|
What qualifies? |
The qualification criteria is the same for both schemes |
The qualification criteria is the same for both schemes |
|
Which companies? |
Firms with fewer than 500 employees with either:
|
Any company except predominately large companies. SME companies can also claim in some cases for expenditure that does not qualify for the SME scheme. |
|
Mechanism |
Enhanced Corporation Tax deduction: 186% (100% basic + 86%). For loss-makers, optional payment credit: can surrender up to the 86% loss at a rate of 10%. |
'Above the line' credit: 20% of expenditure credit is taxable (CT) |
|
Subcontracting |
Can claim for a portion of payments to subcontractors |
Only claim in-house expenses unless activity is subcontracted to qualifying bodies, individuals, or partnerships of individuals. |
|
PAYE / NICs cap |
Limited exemptions. Cap set at £20,000 plus 300% of its total PAYE / NICs liability |
No exemptions. Cap set at 100% of relevant PAYE / NICs liability |
|
Other subsidies |
Claim can be reduced if the R&D project is subsidised, or a grant is received in respect of it and is totally barred if the project has received any state aid. |
No reduction for grant or subsidy, no state aid restrictions |
|
Limit on aid |
Aid to any single project limited to €7.5m state aid |
No limit |
R&D Tax Relief changes relating to subcontracting costs
One of the most important issues is on subcontracting costs. Currently, under the SME scheme, you can claim for using third parties where you have subcontracted out part of the R&D activity and, unless part of a “connected” company, the relief is restricted to 65% of the cost. Under RDEC, subcontracting costs are mainly excluded, unless payments are made to a select group as shown in the table above.
SME claims often include subcontracting costs, and the consultation does consider if, under RDEC, the wider relief available to SMEs is now included. Generally, our view is that they should be, otherwise SMEs could see their claims further reduced.
PAYE caps on payable credits
In addition, both schemes now include different PAYE caps on payable credits. The current SME scheme is more complicated and, by moving to one scheme, the consultation suggests this would help simplify the claim process. The crux of the questions is really which one is easier for a business to understand.
More generous support for different types of R&D
The other key consideration made is whether the government should provide more generous support for different types of R&D, or for more "intensive" R&D companies. This might add greater complexity in order to determine what is an "R&D-intensive company", as most businesses undertaking R&D may consider theirs to be intensive.
We would like to hear your thoughts
The Radius team of R&D specialists at Shorts Chartered Accountants are keen to hear views from our clients and any wider intermediaries on the proposed move to a single scheme. We will be feeding these thoughts directly to the Government, so this presents an opportunity for businesses like yours to have their views heard and considered.
The deadline is 13th March 2023. We are also happy to discuss any other changes you are facing relating to the R&D landscape. Get in touch with the Radius team today if you are interested.
Darryl Hoy
Darryl is the Technical Director of the Radius team. He is a specialist in Research & Development tax reliefs, having previously worked at HMRC as an R&D Tax Inspector.
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