Posted: Wed 19th Jul 2023
Draft legislation for turning the UK's current two research and development tax relief schemes into one has been published by the government.
The decision to potentially merge the R&D Expenditure Credit (RDEC) and SME schemes was first announced in the government's Budget in March this year. A consultation took place and the draft legislation has now been published. However, the Treasury said it has still not decided whether the merger will go ahead.
The legislation says a merged scheme would be based on the "above the line" RDEC scheme but allow for sub-contracted R&D relief claims which is currently only part of the SME scheme. It would also continue to include an enhanced rate for R&D intensive SMEs.
Commenting on the draft legislation, Ellen Milner, director of public policy at the Chartered Institution of Taxation, said:
"A single R&D relief scheme could bring benefits but it will not be without challenges and some tricky trade-offs. In particular there is a trade-off between the potential simplification of a merged scheme and policy decisions to provide additional support to SMEs (or some of them) through different rates of relief.
"This is highlighted by the additional relief for R&D intensive SMEs and the decision to provide this relief, for the time being, through a scheme based on the existing scheme for SMEs. This means there will still be two schemes, although we recognise that some simplification will occur as a result of aligning some underlying concepts and definitions.
"A single scheme with a single rate for large companies and SMEs that do not qualify as R&D intensive will not necessarily be simple or fair for those smaller companies. Complications will arise as a result of the two rates of corporation tax now in place. Additionally we are not persuaded that the reasons for historically giving a higher rate of relief to SMEs generally no longer apply.
"Consequently, whilst we recognise that it would involve additional complexity within the scheme, consideration should be given to having a higher rate of R&D relief for all smaller companies within a single scheme, especially during a transitional period. An approach of different rates would also allow R&D intensive SMEs to be within the single scheme, with a higher rate of relief."
If the merger of the two R&D tax relief schemes goes ahead, the government says it would start in April 2024. However, Milner added:
"We remain concerned that planning for a merger of the schemes in April 2024 is overly ambitious.
"The current pace of change in the R&D relief regime is already challenging for businesses and their advisers, with these proposed changes coming on top of others in the Finance Act passed last week as well as serious ongoing problems around the compliance process for the relief."
Reform of research and development tax relief
The merger is part of the government's attempt to tackle fraud associated with businesses claiming R&D tax relief.
Figures included in HM Revenue & Customs' latest annual report and accounts released on 17 July show the level of error and fraud in R&D tax relief during 2020-21 was 16.7% (£1.13bn), significantly higher than the previously published estimate of 3.6% (£336m).
As part of the efforts to deal with fraud, the Autumn Statement last November announced that the SME R&D tax relief scheme would decrease from 130% to 86%, while the SME credit rate was reduced from 14.5% to 10%.
The move received much criticism and this year's Spring Budget partially reversed the change by introducing an increased rate of relief for loss-making R&D intensive SMEs, although this only applies to around 20,000 businesses.
Other tax announcements on 'Legislation Day'
The R&D announcements were part of the government's so-called 'Legislation Day', which is when draft legislation for an upcoming Finance Bill is published, as well as technical tax documents and consultations mostly from measures announced at the Spring Budget.
Also published was draft legislation for reform of audio-visual creative tax reliefs which will be introduced on 1 January 2024. It includes a higher rate of relief for animation and children's TV. This higher rate of relief will also be extended to animated films.
The full list of 'Legislation Day' announcement was included in this written statement to Parliament by Victoria Atkins, financial secretary to the Treasury.