Merging the R&D relief schemes: consultation

The government has published a consultation on merging the two UK R&D relief schemes. The consultation document, “R&D Tax Reliefs Review: Consultation on a Single Scheme”, is open for comments until 13 March 2023.

If the government decides to proceed with merger following the consultation, it is intended that the new scheme would come into force from April 2024.

Background

The UK currently operates two separate R&D incentive schemes offering tax relief. The SME scheme provides an enhanced corporation tax deduction (currently 230%) with the possibility of surrendering the additional relief for a payable credit at a rate of 14.5%. The research and development expenditure credit (RDEC) scheme for larger companies (and others not qualifying for the SME scheme) provides a payable “above the line”, taxable credit of 13% of the qualifying R&D expenditure.

The government notes that the UK is unique in having two separate schemes for enhanced R&D relief. In addition, the 2022 Autumn Statement announced changes to the rates of relief under the two schemes which will come into effect from April 2023 and will, broadly, level the playing field between the two schemes. Under these changes, the SME super-deduction will fall to 186% (with a payable credit of 10%) and the RDEC scheme credit will increase to 20%.

As a result, the government is now consulting on merging the two separate schemes into one UK R&D scheme, largely based on the current RDEC scheme.

Consultation

The consultation notes that there are currently a number of significant design features which differ between the two schemes and much of the consultation focusses on the way in which a merged scheme might deal with these features.

Subcontracting: the treatment of subcontracted R&D has always given rise to issues and the SME scheme is currently more generous, allowing a claim for up to 65% of a payment for qualifying work subcontracted to an unconnected party. The RDEC scheme, in contrast, assumes that the subcontractor would claim for any R&D on work subcontracted to it. However, the consultation notes that in certain cases there may be subcontractors carrying out work as part of another company’s R&D for which the work is “routine” (not R&D) in isolation so that neither company can claim. As a result, the government is seeking feedback on which approach it would be best to take for the merged scheme.

Cap on payable credits: the consultation notes that experience has shown that some form of cap is necessary to prevent abuse that occurred in the absence of such a cap. Both SME and RDEC schemes currently operate caps based broadly on the relevant PAYE/NICs liabilities of the claimant, but the rules differ. For example, under the SME scheme it is possible for a company to be exempt from the cap where its employees are creating IP and it doesn’t spend more than 15% of its qualifying R&D on subcontracting R&D to connected parties. Again the government is seeking views on the design of a cap for the merged scheme, with a particular emphasis on whether a simplification of the SME cap might be taken forwards.

Threshold: The SME scheme originally operated with a threshold of £25,000 minimum R&D expenditure, but this was later removed in 2012. The Consultation notes, however, that the number of smaller claims has increased, with 50% of claims in 2019/20 being under £25,000 – leading to corresponding administrative burdens and tax fraud risks. Again, the consultation asks for views on the possible re-introduction of a minimum threshold for the merged scheme.

Additional targeted support?

Autumn Statement announced that the government would work with industry to examine whether and how to provide additional support for R&D intensive SMEs following the changes to be introduced from April 2023. As a result, the consultation is seeking views on whether more generous support should be offered to certain sectors and, if so, how might this be done.

Comments

The consultation is open for comments until 13 March 2023 and responses should be sent to RDTaxReliefs@hmtreasury.gov.uk.

Once the government has decided whether or not to merge schemes and the potential design of the single scheme, a final rate will be decided and announced at a future Budget. This will not be consulted on. It is currently the government’s intention that, if implemented, the new scheme will be in place for expenditure incurred from 1 April 2024.