UK proposes new single R&D tax relief system

Tax expert Penny Simmons of Pinsent Masons was commenting after the Treasury opened a consultation (28-page / 313KB PDF) on plans to introduce a new single R&D tax relief system based “as much as possible” on the existing Research and Development Expenditure Credit (RDEC) scheme for larger companies.

According to the government, a single scheme based on the RDEC would be simpler for claimants to apply, it would simplify the UK tax system, and further provide certainty of tax relief at an earlier point, making it more attractive to investors. The government is also concerned about the levels of error and fraud in the existing SME R&D tax relief scheme. A final decision on whether to merge the schemes has not yet been taken and will be announced at a future fiscal event.

Simmons said: “It is disappointing that the government seems intent on pressing ahead with proposals to merge the two schemes, despite acknowledging that changes introduced in the UK autumn statement to scale back the SME R&D tax reliefs are already creating ‘challenges for some R&D intensive SMEs and those in the life sciences sector’.”

“It is incredibly important that R&D intensive businesses, particularly SMEs and affected stakeholders. respond to the consultation to ensure that the government is warned about any unintended adverse consequences of merging the two schemes and whether merger will harm the attractiveness of the UK as a location for R&D investment. Given that the consultation specifically asks for input about whether additional support should be provided for different types of R&D and R&D intensive companies, it is hoped that the Treasury remains willing to engage constructively on this and that it will be possible to safeguard for the interests of R&D intensive SMEs and the future of UK-based R&D investment in start-up ventures,” she said.

Two reliefs are currently available on qualifying R&D related costs. Where certain conditions are met, relief is available for SMEs by way of an additional deduction on R&D costs. In the autumn statement last year, Jeremy Hunt, announced that the deduction will be cut from 130% to 86% from April 2023. Loss-making SMEs may be able to claim a cash repayment of the tax credit in return for surrendering R&D related losses – the cap on repayment is also being cut from 14.5% to 10% of the losses available for surrender. The repayment is also subject to an annual cap of £20,000 plus three times the company’s total Pay As you Earn (PAYE) and National Insurance contributions’ (NICs) liability.

Primarily targeted at larger companies, the RDEC uses a different method of calculating tax relief on R&D costs. The “above the line” RDEC is brought into account as a trade receipt, increasing taxable profits or reducing losses. The RDEC is then credited to the company. The rate of credit is being increased from 13% to 20% from April. 

The proposed new scheme would have a single set of rules when claiming tax relief for subcontracted R&D. The consultation is seeking comments on whether the new rules should be based on the existing rules under the SME or the RDEC schemes – relief for subcontracted R&D is very limited under the RDEC. It is intended that a PAYE/NICs cap will be included in a merged scheme.

It is expected that the new restriction on claiming tax relief for overseas R&D being introduced from April will be included in any merged scheme.

The rate of tax relief under a new scheme has not been decided and will be announced at a future fiscal event – it will not be consulted on.

The Treasury’s consultation is open for comments until 13 March 2023. If implemented, it is intended that the new scheme will be introduced from April 2024.

Simmons said: “The timeline for implementation is very ambitious – allowing just over 12 months to design, legislate and implement the new scheme. This may create challenges for R&D intensive businesses as they will have very little time to prepare and adjust their financial modelling to adapt to the new scheme.”