In January 2023, the UK government asked for feedback on proposals to combine the UK’s two research & development (R&D) tax reliefs: the Research and Development Expenditure Credit (RDEC) and the SME R&D Tax Relief systems. The stated aim was to simplify the complex tax relief system while ensuring taxpayers’ money is spent as effectively as possible in supporting the economy.
On July 18, the government published draft legislation for the proposed new single scheme. The publication of the draft legislation gives them the flexibility to implement the proposals as early as April 2024, although it should be noted that the government has not yet committed to this date.
The key proposals are summarized below:
- Replacement of the two existing R&D reliefs with a single unified scheme, which will provide tax relief in a similar way to the existing RDEC scheme.
- Enhanced relief will be available for R&D intensive companies as announced in the April 2023 budget. An R&D intensive company is defined as one that spends 40% or more of their total expenditure on qualifying R&D activities. Claimants meeting this definition will be able to claim the credit as an enhanced loss which can be surrendered for a payable credit, in much the same way as the old SME scheme, at a rate of 14.5%.
- The previously announced rules relating to qualifying overseas expenditure (which had been postponed from April 2023) will be included in the new regime. This means all subcontracted expenditure must be UK expenditure or fit within the narrow definition of qualifying overseas expenditure.
- The rules on subcontracted expenditure are being rewritten. This is unsurprising given the two existing regimes take a very different approach to subcontracted expenditure. Under the proposals, a claimant company will be able to include the cost of R&D work subcontracted to another company. This is highly significant for companies that have previously claimed under the RDEC regime, as subcontracted expenditure was ineligible under this regime. However, companies that have had R&D work subcontracted to them by another UK company will not be able to include the related costs in a claim.
- There will be a change to the definition of qualifying earnings for “Externally Provided Workers.” Where a claimant company engages externally provided workers to carry out R&D, expenditure on those workers will only qualify to the extent that those workers’ earnings are taxed through PAYE, or attributable to R&D activity outside the UK that is covered by the new qualifying overseas expenditure legislation.
- Subsidized work may also be affected; the draft legislation also includes a reference to subsidized expenditure not being claimable.
- New provisions are to be introduced targeting artificially inflated claims. Disqualifying arrangements entered into for the purpose of making or increasing a claim to which the claimant is not entitled will be disregarded.
The draft legislation demonstrates the government’s continued support for R&D activities in the UK, shifting the focus from the companies conducting the R&D to the companies taking the entrepreneurial risk and funding the R&D.
Stakeholders are encouraged to actively engage in the technical consultation process and contribute their insights, as their feedback will play a crucial role in shaping the final legislation. It is important to note that no final decision has been reached regarding the merger. An official announcement about the consultation’s outcome is expected during an upcoming fiscal event.
Frazier & Deeter welcomes your opinions on the proposed merger of the two R&D tax relief schemes. If you wish to share your view, please email thomas.wells@frazierdeeter.com where these replies will be collated and passed to HMRC for their consideration.