The future of R&D tax relief?

The future of R&D tax relief?

ATT technical officer, Emma Rawson, takes a look at the challenges arising from the proposed new combined R&D relief scheme

The future of R&D tax relief?

The pace of change in the world of R&D tax relief continues to leave businesses and their advisers racing to keep up. This April alone will see a number of changes to both the Research and Development Expenditure Credit (RDEC) and Small and Medium Enterprise (SME) regimes, as well as a reduction in the relief available to SMEs.

Many of these changes are driven by concerns that R&D relief, and the SME scheme in particular, is not delivering value for money and is a target for fraud and abuse. In an attempt to address these issues, a consultation published on 13 January proposes merging the current RDEC and SME schemes into a single, simplified scheme from as early as April 2024.

Whilst such a step could represent a radical simplification, there are a number of issues that need to be addressed.

How might a combined scheme work?

Instead of the two schemes we currently have, there would be just one R&D relief scheme available to all companies, regardless of their size.

The intention is for this new scheme to be based on the current RDEC regime as far as possible.  This means that SMEs would no longer be entitled to an enhanced deduction and repayable credit.  Instead, all companies would receive relief by way of an ‘above the line’ taxable credit.

As set out in our consultation response, the ATT is worried that this approach does not adequately take into account the very different nature of SMEs compared with large companies, and that SMEs risk losing out if they are forced into an RDEC-like scheme. Ultimately, small companies are not just larger companies run on a smaller scale.

One size doesn’t fit all

The consultation outlines a number of areas where the two schemes currently diverge, and asks the question as to which approach the new scheme should follow – RDEC or SME?  Unfortunately, whichever route is chosen, there will be winners and losers.

For example, where R&D is subcontracted, under the SME scheme the company subcontracting the work may be able to claim relief, whereas under RDEC it is the subcontractor.   If we followed the RDEC approach in the new scheme, this would deny relief to SMEs who may rely on subcontracting whilst building up their own expertise. By contrast, following the SME approach would benefit large companies who subcontract work, but reduce relief for SMEs who act as sub-contractors.

A similar issue occurs when looking at capping relief by reference to the claimant’s PAYE and NIC bills. Currently we have a relatively generous, but complex SME cap, and an RDEC cap which is simpler, but set at a lower level (and arguably far too low for many SMEs).

The consultation also explores whether more relief should be available for certain types of R&D, or for ‘R&D intensive’ companies.  Whilst this might sound like a good idea, it could be difficult to implement in practice. For example, how would ‘R&D intensive’ be defined?  Who would decide whether a company is R&D intensive, or what types of R&D should receive additional relief?  These issues will increase complexity and uncertainty, as well as raising the risk of boundary-pushing and abuse.

More: R&D tax relief reform “isn’t enough” to prevent bogus claims, inquiry finds

Clearly, a ‘one size fits all’ approach under the new regime will not suit everyone.  However, allowing different companies to apply different approaches would also cancel out some of the simplification achieved by having a single scheme in the first place.

What else might change?

The consultation explores two other design areas – qualifying indirect activities (QIAs) and a minimum expenditure threshold for claims.

There are concerns that a lack of clarity on QIAs leads to boundary-pushing in that area.  It may well be that, under the new combined scheme, we see relief for QIAs restricted or even removed.

Although the previous £25,000 SME scheme threshold was reduced to £10,000, and eventually dropped altogether in 2012, concerns over fraud and the growing cost of R&D relief could also mean a return to a minimum spend threshold in the combined scheme.

Too much, too fast?

Regardless of the approach taken on the areas outlined above, the new combined scheme will have a significant impact on the relief companies receive for carrying out R&D, especially amongst SMEs.

More: R&D exodus for UK STEM amid ‘complexity and uncertainty’

It is therefore worrying that the plan is to introduce it from April 2024.  This would allow little more than a year to not only address the design issues posed by the consultation, but also for HMRC, software providers, taxpayers and agents to update their systems and processes.  Taking all of these challenges into account, it is difficult to see how an April 2024 start date is feasible.

Instead, given the fundamental changes proposed and their potential impact on the UK R&D landscape, what we need is careful consideration, rather than a rush to reform.

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