The government’s proposed merged R&D tax relief scheme
The government consulted earlier this year on the merging of the two existing research and development (R&D) tax reliefs – comprising the R&D Expenditure Credit (RDEC), which chiefly applies to large companies, and the SME scheme – into a single scheme.
On 18 July 2023, the government published draft legislation for a single merged R&D scheme based on the existing RDEC scheme. The government is yet to make a final decision over whether to introduce a merged R&D scheme but it has published the draft legislation for consultation with a view to speeding-up the introduction of the scheme, should it proceed with this approach.
Operation of proposed R&D scheme
The fundamental operation of the proposed merged R&D scheme will be familiar to those larger companies currently claiming under the RDEC, with qualifying R&D expenditure being determined and a taxable expenditure credit calculated and brought into the financial statements.
In the draft legislation, the rate at which this expenditure credit is to be calculated is set at 20%, being the rate at which the existing RDEC has been set since 1 April 2023. The draft legislation does, however, give the Treasury the power to alter the rate by regulations, meaning this could be changed relatively easily in the future.
By way of illustration, for a company with taxable profits of £500,000 (before taking into account R&D expenditure) and qualifying R&D expenditure of £50,000, the merged R&D tax relief would operate as follows:
As far as some of the detail of the proposed merged scheme is concerned, the following points should be noted:
- The draft legislation proposes capping the amount of the RDEC that can be used, other than to reduce the company’s current year corporation tax liability, at £20,000 plus three times the company’s PAYE and NIC liabilities for the period. This is based on the rule currently in place under the SME scheme.
- Qualifying R&D expenditure for the purposes of the scheme will include “eligible sub-contractor expenditure”, being an element of payments to sub-contractors, where this is attributable to R&D activities undertaken by the company (and where this is either UK expenditure or certain limited non-UK expenditure). Expenditure sub-contracted to the company itself, and subsidised expenditure, will not qualify for relief under the proposed new single scheme. Again, this approach is similar to the position that currently exists under the SME scheme.
Commentary
At the same time as it published draft legislation on this proposed merged scheme, the government also published draft legislation on an enhanced payable credit under the existing SME scheme for R&D-intensive SMEs. We have published a separate article summarising this proposed legislation. It is currently proposed that the rules for R&D-intensive SMEs would remain in place even if the merged scheme is introduced.
The government has indicated that (assuming it does go ahead) a merged scheme would be introduced in April 2024; this does not leave a great deal of time and, while it is possible that this may be pushed back, companies that carry out qualifying R&D will want to assess the implications of a merged scheme as soon as possible.
Contact us
The above is a brief summary of the proposed merged R&D scheme in the draft legislation and our initial views. Please do contact our specialist R&D team for further information about the implications of the proposed scheme, or to discuss any element of R&D tax relief.
