Further change is potentially afoot in the ever-evolving landscape of R&D tax relief. Following the release of draft legislation earlier this week, there is much to consider. Undoubtedly, a key talking point is the possibility of merging the SME and RDEC schemes together, and what this might look like going forward.
It’s important to keep in mind that the proposed changes are not yet set in stone, and if the government does go ahead at all with a new merged scheme, the final scheme could still look very different to this initial proposal.
Either way, we have outlined the key changes to the relief legislation which the government put forward on 18th July.
A potentially merged scheme
The announcement of a merged R&D tax relief scheme has been anticipated by professionals for a while now. Whilst we will need to wait for future fiscal events for an official decision regarding whether this will go ahead, the option has been kept open by the government for implementation from 1 April 2024.
Here is a summary of the key points the government has been put forward:
- A new merged R&D scheme has been proposed. This will combine the current SME and RDEC schemes with the view of simplifying the relief as a whole.
- This new, single scheme will be structured in a similar way to the current RDEC regime - as an expenditure credit with a headline tax credit rate of 20%. This means that enhanced R&D deductions will no longer be available unless you can be classified as a R&D-intensive, loss-making SME.
- However, the proposed merged scheme differs from RDEC in a number of ways.
- Firstly, companies will be able to claim for payments to UK-based subcontractors as part of their R&D expenditure .
- Secondly, though the credit will still be capped in accordance with the claimant’s PAYE/NIC liability, a more generous version of this cap will apply.
- Thirdly, though no final decision has been made on this, we could see subcontracted and subsidied R&D disallowed altogether.
Additional clarification on UK and overseas expenditure
Although there is a lot to review following the release of the government’s 25 page draft legislation document, one thing that remains apparent is their stance on supporting innovation taking place within the UK.
UK and overseas expenditure for relating to R&D tax relief was specifically addressed in this document:
- From 1 April 2024, expenditure on subcontractors and externally provided workers will only qualify if it is:
‘attributable to relevant research and development undertaken in the UK’ OR
‘attributable activity undertaken overseas which is necessary due to geographical, environmental or social conditions not present or replicable in the UK.’
- The cost of work and the availability of workers are specifically to be excluded from reasoning for using overseas workers to conduct R&D activity.
What does this mean for SMEs?
Time to review, reflect and prepare
What we see here is a step towards a simpler R&D tax relief scheme that is in line with the government’s policy intent. Whilst there is certainly a lot to reflect on following the release of R&D draft legislation, it’s important to note that this is subject to change and could even be scrapped altogether.
As it stands, the government has left open the possibility of implementing legislative changes in the coming spring, but work has yet to be done around exact design and implementation.
If and when changes are confirmed, a timetable for implementation will be announced. In the meantime, companies can take the opportunity to have proactive conversations with your advisors, to reflect on where you currently stand with your R&D claims, and to prepare for any changes.
Supporting you with your current and future R&D claims
Our incentives and reliefs experts are on hand to support you through any upcoming changes. They can ensure that your claim process is smooth and compliant with the latest legislative changes, whilst answering any questions on the draft legislation. Get in touch today.