Proposed merged R&D scheme and additional tax relief for R&D intensive SMEs

The Government is continuing its consideration of a merged scheme for R&D tax relief, and a brief outline of progress to date is set out below. As a starting point, genuine simplification, particularly in light of the current reported levels of error and fraud, must be welcomed by all in the industry to help move from the current environment to something better and brighter. It is also worth noting that additional relief for R&D intensive SMEs is currently the subject of draft legislation, with the effective date to be in respect of expenditure incurred on or after 1 April 2023, upon Royal Assent of the Finance Bill 2023 – 2024.

What is proposed?

The rate of relief is set to be 20%, in line with the current RD Expenditure Credit rate – this represents a further reduction for claimants under the existing SME R&D regime.
Economic impacts of the proposed merger appear to be undisclosed at this stage but would seem to further reduce the government’s investment in R&D.
Timing of the potential merger is linked to a future fiscal event and it is believed that the intention was to bring this into effect as early as April 2024 but we understand that no firm decision has as yet been made.
Opportunities for further simplification appear to have been missed, such as in relation to the parallel scheme for R&D intensive SMEs.
The current draft is structured such that expenditure on subcontracted activities would be qualifying for the entity commissioning the work, not for the subcontractor itself – this is a significant change, one which was not anticipated and one which has caused great concern in a number of sectors, including construction, engineering consultancies and others.

The proposed merged scheme – where are we now?

The timeline of events so far is as follows:

13 January 2023 – Government announces a consultation on the design of a potential single R&D scheme for both SME and large companies.
13 March 2023 – Deadline for responses to be submitted to HM Treasury on the consultation questions and outline.
18 July 2023 – Government published a summary of the responses received and also published draft legislation for a single merged R&D scheme based on the existing regimes.

Summary of Responses from January 2023 consultation

Draft legislation for a single merged R&D scheme