HM Treasury has launched an eight-week consultation on the proposal of a single R&D scheme. This is the latest suggestion in a string of reform changes implemented by the Government. Leading chartered R&D Tax consultants LimestoneGrey highlight the key points.
So how did we reach this point? Why is the Government set on R&D tax credit reform?
Historically, the UK has relied on innovation to encourage productivity growth. This has slowed since the financial crisis, with COVID undoubtedly contributing to the decline. Businesses will need to increase its investment in R&D to drive further growth, and the Government recognises the importance of R&D tax credits in helping companies to do so. However, there are areas in which Government wants to improve the relief.
1. Ensure the relief is fit for purpose
R&D tax credits were created in the year 2000 and research and development techniques have dramatically changed since this time.
2. Reducing fraudulent activity and abuse
From both businesses and rogue agencies. From 2021 to 2022 the estimated the level of error and fraud within Corporation Tax R&D reliefs was £469 million, £430 million in the SME scheme and £39 million in the Research and Development Expenditure Credit (RDEC) scheme
3. Value for money
Government wants to ensure that the provision of R&D tax credits is done so in a fiscally sustainable way for the taxpayer.
Despite the UK having one of the most generous R&D tax relief systems in the world the level of investment in R&D by UK businesses has lagged other countries.
Previous changes such as the PAYE cap on SME claims have been implemented for some time, with further changes focused on reducing fraud and ensuring the relief is fit for modern day R&D being put into effect from 1st April 2023.
The most recent change has seen the generosities of the two R&D tax schemes more broadly aligned, with the government arguing that this will provide better value for money for the taxpayer. The UK is very unusual in operating two schemes and this change has now provided scope to merge the two reliefs, with suggestions that moving to one unified regime should deliver simplification for companies.
What will the new consultation discuss and how will it affect further R&D tax credit reform?
The consultation suggests that the single scheme should be based on the current RDEC scheme, which is primarily aimed at larger companies and suggests ways in which this could be implemented. It will reflect responses received from previous reform consultations.
It seeks feedback from research and development intensive businesses and those representing them on the proposed design of the scheme, covering areas such as:
- The benefits and restrictions of the current RDEC scheme and whether this is the best platform for a single relief
- The management of subcontracting costs in a merged scheme, as at present, the rules are different for SME and RDEC claims
- The quantum of any cap, linked to claimants PAYE/NI liabilities
- A re-introduction of a minimum expenditure threshold in order to further tackle abuse
- Targeted support for certain sectors, such as green technology or life sciences.
Once a decision has been made on whether or not to create a single relief, a final rate will be announced at a future fiscal event. This will not be consulted on. It is currently the Government’s intention that, if implemented, the new scheme will be in place for expenditure incurred from 1 April 2024.
Matthew Jones, managing director at LimestoneGrey, commented:
Understandably, many companies who claim under SME relief will be bitterly disappointed in the reduction of the scheme’s generosity. The speed in which the changes will be implemented will also pose frustration as it gives very little time for companies to plan.
I anticipate that the launch of this new consultation will concern R&D intensive businesses as this is potentially yet another change that they will be forced to navigate.
As a chartered tax advisor, I am fully in support of ensuring that the relief is:
- Fit for purpose
- Steadfast against fraud and abuse
- Value for money for the taxpayer
However, the implementation of piecemeal changes only causes confusion for companies and makes the process even more complicated for them.
A single scheme for all companies could provide benefits, especially around added certainty of the cash benefit a company can receive. However, it needs to be designed in a way which does not penalise smaller companies and start-ups, which often use external labour or subcontractors rather than salaried employees.
We would urge companies to speak to a qualified and regulated R&D tax credit advisor to gain a full understanding of these changes and how they may impact future R&D claims.