The government has now consulted on replacing the two existing Research and Development (R&D) schemes for tax relief with a single merged scheme.
The result: uncertainty. In its own words: ‘The government has not yet taken a decision on whether to merge and intends to keep open the option of doing so from 2024. A decision on whether to merge will be made at the next fiscal event.’
Flashing amber
Though the government has not yet given the green light, there is a lot of activity to suggest it’s at least on flashing amber. Draft legislation has been published and details of how the merged scheme might work are being consulted on.
It is a challenging outcome for companies involved in R&D, because change, if it comes, could come soon. The aim is to replace the existing Research and Development Expenditure Credit (RDEC) and the small and medium-sized enterprise (SME) relief, and the new rules could apply for expenditure incurred on or after 1 April 2024. As many of those who replied to the recent government consultation pointed out, this is a very ambitious timeline.
What is likely to come next?
The merged scheme is set, broadly, to operate along the lines of the RDEC, rather than the existing SME scheme. The headline rate of tax relief is expected to be 20%, with relief given via an expenditure credit, based on a percentage of R&D costs, offset against the company tax liability. However, there are variations from the current RDEC rules, notably as regards costs for subcontracted R&D work. These are subject to considerable restrictions with RDEC, but it is anticipated that the new merged scheme will generally allow claims for such costs.
The draft legislation uses the more generous version of the PAYE/NICs payable credit cap which is included in the existing SME scheme. A restriction on some overseas expenditures, mostly ruling out relief for outsourced overseas R&D costs, has already been announced, and was originally intended to take effect from 1 April 2023. It now takes effect from 1 April 2024 and will also apply under the new merged scheme. Two other changes being kept under review are the introduction of a minimum expenditure threshold and reform to the rules on qualifying indirect activities.
Not quite a single scheme
The provisions for additional relief for R&D-intensive loss-making SMEs (companies where qualifying R&D spending is 40% or more of total expenditure), which have applied for expenditure incurred on or after 1 April 2023, look set to stay. These rules will continue to sit alongside the merged scheme.
Be prepared
R&D is fairly fizzing with change at the moment. The past year has already seen major changes to the rules around claims procedure, which are only just starting to bed in. HMRCʼs latest Annual Report and Accounts continue to flag up concerns about ʻunacceptableʼ levels of error and fraud – particularly in the SME scheme, suggesting there is likely to be little let up in its increased compliance activity. Now, with the proposed merged scheme, it looks like off with the old, and on with the new – all over again. Rarely has it been more important to be on top of the R&D rules.
We should be only too pleased to help you review R&D claims and procedures, and take stock of the impact that the latest proposals might have on your business. Please get in touch with us on 01295 250401 or email solutions@ellacotts.co.uk. You can also contact us here with your query.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
