The UK government published a consultation in January 2023 on a potential merged R&D tax relief scheme which ran until 13 March 2023. This would involve merging the SME and RDEC scheme into one and consideration of the responses has led to the government publishing draft legislation on 18 July 2023 on the proposed design of the merged scheme.
The two existing R&D schemes are the Research and Development Expenditure Credit (RDEC) and the Small and Medium Enterprise (SME) scheme.
The hypothesis is that merging these into a single R&D Tax Relief scheme would simplify what has become a complex scheme, with frequent errors and cases of fraud.
The government published a new policy paper on July 18th 2023 outlining their proposals for a potential merged R&D scheme, in addition to additional tax relief for R&D intensive SMEs.
The government’s proposals – at a glance
In brief, the government is proposing several changes to the R&D scheme in the UK. These are as follows:
- A merged, single R&D relief scheme, calculated as a % of qualifying R&D expenditure and granted as an expenditure credit.
- The current 20% rate will be retained which gives rise to a 15% net tax benefit – i.e. if you spent £100,000 on qualifying R&D expenditure, you would save £15,000 in Corporation tax/tax credit.
- Adoption of the SME scheme’s current PAYE/NICs payable credit cap, rather than the more prescriptive RDEC PAYE/NI Cap.
- A higher rate of tax credit of 14.5% for R&D intensive SME’s where 40% or more of their total company expenditure relates to qualifying R&D expenditure.
- Limits on the relief available for overseas expenditure – this update was proposed but delayed initially and will now be effective from 1 April 2024.
A final decision on whether to merge schemes will be made at a future fiscal event – Autumn 2023 or Spring 2024 statements being the most likely.
Why are they proposing a single R&D Tax Relief scheme?
The government believes a simplified R&D Tax Relief scheme will drive more innovation among business and industry, improving accessibility and making administration easier for organisations that claim.
A particular area they hope to clarify is payments to subcontractors. Qualifying SMEs can currently claim for most subcontractor costs, whereas larger companies claiming under the RDEC scheme generally can’t, with a few exceptions.
The government’s proposals would see the SME scheme policy be brought into the merged single R&D Tax Relief scheme, which is good news for larger businesses who would be able to broaden their cost base for claims.
This has been an area of discussion between HMRC and professional advisors for some time and should clear up some of the ambiguity over which company is entitled to make a claim where the R&D has been outsourced and where there is a commercial contract in place. It seems to lean towards the company who has outsourced the work being able to make the claim, rather than the company/contractor performing the R&D activity as a service. But we will have to wait for the finer detail to be announced later in the year.
What is the proposed single R&D Tax Relief rate?
The government is proposing a single rate of relief of 20%, as in the current RDEC scheme. Some thought that this figure might be increased, but that is not the case based on the draft legislation.
When will the consultation be completed?
The government’s technical consultation on these proposals will close in September 2023, leaving open the possibility of a new single R&D Tax Relief scheme from April 2024.
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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