The draft legislation has now been issued, therefore it is highly likely we will see this coming in, albeit subject to amendments. The government has said that it will make a final decision to launch these changes at ‘the next fiscal event’, presumably at the Autumn Statement announcement.
For those currently claiming R&D tax credits, and new start-ups / scale-ups who will need to make claims, we have summarised the proposals and how they will impact R&D tax claims below.
What is happening with R&D tax claims?
The Government has completed a consultation on a merger of the current research and development expenditure credit (RDEC) and small and medium enterprise (SME) relief schemes. This merger will see a new single scheme for R&D tax relief, for accounting periods beginning on, or after 1 April 2024.
The rationale behind creating a single scheme is to simplify R&D tax relief, to reduce fraud and to make it easier for claimants.
What might the merger of schemes mean in practice?
- A single R&D relief will be available for a majority of companies as an expenditure credit. According to proposals, this will be paid at a flat 20% gross credit, subject to corporation tax (so the net benefit would be around 15%). To put this in perspective, the current benefit for a profitable SME is about 22%, so the cut is roughly by one third of the current benefit.
- Loss-making, R&D-intensive SME companies that spend more than 40% of their expenditure on R&D will still be eligible for enhanced rates after 1st April.
- No claim for an R&D expenditure credit can be made for costs which are subsidised, such as by a grant.
- New restrictions on overseas expenditure on subcontractors and Externally Provided Workers. The only qualifying overseas expenditure would be that which is undertaken overseas due to geographical, environmental, or social conditions not present or replicable in the UK.
- All companies will be able to claim UK-based subcontractors. At the moment, only SMEs are usually able to include subcontractor spend as an eligible cost.
- Externally Provided Worker eligible costs to be restricted to 65% of the staff providers’ relevant staff costs, rather than just 65% of the payment a company makes to the staff provider.
- The PAYE/NIC cap by which a credit can be restricted, will adopt the more generous SME cap rules rather than the more restrictive RDEC ones. It is fairer to SMEs that the cap is £20,000 plus 3 times company PAYE and NIC as opposed to the RDEC cap (just PAYE & NIC of R&D staff), and this will ultimately help SMEs with a smaller payroll.
Our thoughts
We like that the SME cap on payable credits is included as part of the new single scheme which will help smaller businesses with their claims. Another positive for large companies is that they will be able to claim on R&D subcontracted to other UK-based companies, unlike the present situation under RDEC.
However, the proposals mean that smaller companies may see a further reduction in the benefit they get from R&D relief claims, which of course is disappointing. We hope that this does not reduce their appetite for carrying out R&D, as it remains an attractive tax relief for eligible projects.
It is also worrying that where grant funding is subsidising R&D projects, R&D tax relief cannot be claimed at all – which seems a disincentive to highly innovative, R&D lead companies. Often grant funding and R&D tax relief go hand-in-hand, to compensate the risk of embarking on adventurous projects and thus driving forward our tech industry and economy.
This is, of course, all subject to change as the legislation passes through parliament and receives approval. However, given a proposed implementation date of 1st April 2024, this does seem quite hurried for such a large change.
We will keep you updated with more information as and when these changes are announced.
With more than 20 years in tax, Paul provides tax compliance and advisory services to clients, and specialises in R&D and capital allowance claims.