The government has now consulted on replacing the two existing Research and Development (R&D)
schemes for tax relief with a single merged scheme. The result: uncertainty.
In its own words: ‘The government has not yet taken a decision on whether to merge and intends to keep
open the option of doing so from 2024. A decision on whether to merge will be made at the next fiscal
event.’
Flashing amber
Though the government hasn’t yet given the green light, there’s a lot of activity to suggest it’s at
least on flashing amber. Draft legislation has been published and details of how the merged scheme
might work are being consulted on.
It’s a challenging outcome for companies involved in R&D, because change, if it comes, could come
soon. The aim is to replace the existing Research and Development Expenditure Credit (RDEC) and the
small and medium-sized enterprise (SME) relief; and the new rules could apply for expenditure
incurred on or after 1 April 2024. As many of those who replied to the recent government consultation
pointed out, this is a very ambitious timeline.
What is likely to come next?
The merged scheme is set, broadly, to operate along the lines of the RDEC, rather than the existing SME
scheme. The headline rate of tax relief is expected to be 20%, with relief given via an expenditure
credit, based on a percentage of R&D costs, offset against the company’s tax liability. But there
are variations from the current RDEC rules, notably as regards costs for subcontracted R&D work.
These are subject to considerable restrictions with RDEC, but it’s anticipated that the new merged
scheme will generally allow claims for such costs.
The draft legislation uses the more generous version of the PAYE/NICs payable credit cap which is
included in the existing SME scheme. A restriction on some overseas expenditure, mostly ruling out
relief for outsourced overseas R&D costs, has already been announced, and was originally intended
to take effect from 1 April 2023. It now takes effect from 1 April 2024 and will also apply under the
new merged scheme. Two other changes being kept under review are the introduction of a minimum
expenditure threshold, and reform to the rules on qualifying indirect activities.
Not quite a single scheme
The provisions for additional relief for R&D-intensive loss-making SMEs (companies where qualifying
R&D spending is 40% or more of total expenditure), which have applied for expenditure incurred on
or after 1 April 2023, look set to stay. These rules will continue to sit alongside the merged
scheme.
Be prepared
R&D is fairly fizzing with change at the moment. The past year has already seen major changes to
the rules around claims procedure, which are only just starting to bed in. HMRC’s latest Annual Report
and Accounts continues to flag up concerns about ‘unacceptable’ levels of error and fraud –
particularly in the SME scheme, suggesting there is likely to be little let up in its increased
compliance activity. Now, with the proposed merged scheme, it looks like off with the old, and on with
the new - all over again. Rarely has it been more important to be on top of the R&D rules.
We should be only too pleased to help you review R&D claims and procedures, and take stock of the
impact that the latest proposals might have on your business.