Another step towards major reform to R&D tax reliefs were taken last week as the government launched a consultation into the proposed changes.
The idea for a single, simplified R&D tax scheme used by large businesses and SMEs was first announced in the Chancellor’s Autumn Statement last year. The Treasury has since provided firmer details on how this might look in its consultation, which runs until 13 March.
Background to the proposed changes
The R&D scheme is currently split into two strands. There is a dedicated scheme for SMEs, while larger companies, and SMEs ineligible for the SME scheme, apply under the Research and Development Expenditure Credit (RDEC) scheme.
However, the government is concerned that it is not getting value for money from the SME scheme, which it says incentivises 60p to £1.28 of additional R&D for each £1 spent. In contrast, RDEC incentivises £2.40 to £2.70 additional R&D per £1.
The SME scheme costs the Treasury more than RDEC and has grown at a faster rate.
HMRC also believes that fraud and error in the SME scheme is higher than RDEC. For 2021-22, it is estimated that the level of fraud for R&D tax relief reached £469 million, with £430 million coming from the SME scheme and £39 million from RDEC.
In light of this, the government has already made some changes to the SME scheme.
At the Autumn Statement, it was announced that the SME scheme would become less generous from the start of the next financial year.
For small and medium-sized UK businesses with expenditure on or after 1 April 2023, the uplift rate on tax relief will fall from 130% to 86%, and the tax credit rate will drop from 14.5% to 10%.
The rate for the Research and Development Expenditure Credit (RDEC) scheme will increase from 13% to 20% for expenditure over the same period.
These aren’t the only changes coming in April.
How will a single R&D scheme work?
The Treasury is proposing a single scheme so companies of all sizes make claims in the same way, following the same rules.
It would be modelled on RDEC as much as possible, and it won’t take long to implement — it is intended to be in place for expenditure incurred from 1 April 2024.
The government claims this move will benefit SMEs. It says this will give them clearer information about how much relief they will receive, which will help them budget for their innovation work and attract investors. Currently, SMEs only know with any certainty what they will receive at the end of the accounting period.
It would also benefit those companies that make claims under both RDEC and the SME scheme by making it less complicated.
At the moment, two of the biggest points of difference between the schemes involve how relief is paid for any subcontracted work, and PAYE and National Insurance caps. The government intends that all companies will calculate these in the same way, but is open to views from stakeholders about how this will work.
What else is the government considering?
As part of the consultation, the government is also reviewing which qualifying indirect
activities (such as HR or maintenance) should be included in R&D claims. It says results from a previous consultation showed these should be restricted or redesigned, and the government is therefore considering reforming the rules.
It may also reintroduce a threshold expenditure level in order to qualify for R&D tax relief. This was set at £25,000 when the SME scheme was first introduced, then reduced to £10,000, and removed altogether in 2012.
Since then, the number of smaller claims have risen significantly, and in 2019-20, 50% of claims were worth £25,000 or less.
Commitments to SMEs
As part of this overhaul, the government says it recognises the reforms will create challenges for R&D-intensive SMEs.
For instance, reintroducing a threshold expenditure level would impact companies with small R&D claims.
The government will work with industry to understand whether and how to provide further support for R&D-intensive SMEs, without significant change to the overall cost to the Treasury.