R&D Tax Relief Reform Scheduled for April 2024

Draft legislation

To set the context, a recent consultation explored the possibility of merging the RDEC and Small or Medium-sized Enterprise R&D regimes.

This aims to simplify the process, making it more efficient for businesses engaged in R&D activities. Undoubtedly, it is also driven by the fact the government believe the RDEC brings a considerably better ‘return on investment’ compared with the SME scheme. The Spring Statement 2022 quoted evaluations suggesting that “RDEC stimulates between £2.40-£2.70 of additional private R&D expenditure for each £1 of tax relief claimed, while the SME scheme only stimulates £0.60-£1.28”.

In other words, it has been quite clear for some time that we are on a steady path towards a merged scheme which will be more akin to RDEC than the SME scheme. The consultation summary was set to be published on Legislation Day and some progress towards the merged scheme was widely expected. What we did not anticipate was a significant fast-forward made by the Government publishing the draft legislation before the merger of the schemes was officially confirmed. It is quite unprecedented for draft legislation to be introduced in this manner.

The draft legislation is said to be published to ‘keep the options open’ and the final decision is yet to be made. However, the only logical conclusion we can draw from the fact that time and effort were invested into the draft, is that the R&D regimes will be almost certainly aligned in more or less the spirit the draft suggests.

What this means

The merge of the schemes has been generally supported by the tax professionals as it has the potential to simplify the process, making it more accessible, and encouraging even greater innovation and investment in R&D activities.

However, regrettably, in its current form, the proposal will see further cuts to the R&D tax relief available to SMEs.

While the SMEs claimants paying Corporation Tax at 25% may see their effective R&D tax saving decrease from the current 21.5% to 15% of their R&D spend, some benefits of the current SME scheme will become available to companies currently claiming under RDEC.

Key highlights of the proposed changes

• The merged scheme will operate as an expenditure credit, following the existing RDEC model.
• The credit rate for the merged scheme is set at 20% (subject to Corporation Tax), which broadly represents a tax saving of 15% of the qualifying R&D spend, extending the current regime rate to SMEs.
• Loss-making R&D intensive SMEs will retain the additional R&D relief as introduced in Spring Budget 2023, providing cash credit worth 27% of the qualifying R&D spend.
• Payments to subcontractors will be eligible for the merged scheme, extending this benefit to companies currently claiming under RDEC.
• The merged scheme will apply a more generous version of the PAYE/NICs cap, extending the advantage of the current SME scheme to companies currently claiming under RDEC.
• The draft legislation proposes to exclude all subsidised expenditure from the R&D relief, impacting considerably companies receiving grants and similar subsidies who would no longer qualify for any R&D relief on the funded part of their projects. This is specifically highlighted as an element which is still under consideration, and it is likely that some changes or even a full reversal of this proposal will be made.
• Companies acting as a subcontractor to other companies will not be able to claim any relief to prevent ‘double-dipping’. The wording of the draft legislation mirrors the current exclusion of subcontracted R&D from the SME scheme. The exact meaning of subcontracted in this context is the subject of much discussion between HMRC and tax professionals. Hopefully, we will have more clarity on this subject before the new rules come to effect.

It’s essential to remember that the legislation is still in the draft stage, and much can change before the new reformed R&D regime is finalised.

Remember, knowledge is power, and being well-informed will allow you to make the best choices for your financial future. There is a lot of change in the air at the moment, and we will keep you informed of any future developments.