Government consultation on a single scheme for R&D Tax Relief

On 13 January 2023, the Government announced a consultation on the design of a potential single R&D scheme for both SME and large companies. This would represent a significant change in the way relief is delivered for SMEs, with this simplified, single scheme being based on the R&D Expenditure Credit scheme currently in place for large companies. The proposed shift to an above-the-line credit is intended to make the scheme simpler to administer as well as ensuring the relief plays a more central role in business decision making due to its “above-the-line” nature (as is the case for the R&D Expenditure Credit already in place for large companies).

This consultation follows on from reforms to both schemes due to take effect for accounting periods beginning on or after 1 April 2023 and changes in the rates (increase to the RDEC rate and decreases to the SME deduction and credit rates) taking effect for expenditure incurred from 1 April 2023.

The Government is committed to supporting SME R&D and is inviting views on the design of such a single, RDEC-like scheme, asking for views from businesses, representative bodies and accountants informed by experience with the existing R&D schemes. Of particular interest to the Government are the views of R&D intensive businesses and their advisers.

Such input will be important in helping shape the final proposal. Once the Government has decided whether or not to merge the schemes and the potential design if so, a final rate for the scheme will be decided within the cost envelope of the R&D reliefs and announced at a future fiscal event. If implemented, the new scheme is expected to be in place for expenditure incurred from 1 April 2024.

The consultation includes a range of questions, such as how subcontracting costs should be treated within a merged scheme, which of the current PAYE and NICs caps should be implemented and whether more generous support should be provided for different types of R&D or more R&D intensive businesses. Also included are questions as to whether claiming Qualifying Indirect Activities influences decisions to undertake R&D and whether a minimum expenditure threshold should be introduced, and if so, at what level.

We are in the process of drafting a response to this consultation and would welcome input from interested parties. Responses are to be submitted to HM Treasury by 13 March 2023.