Consultation on a single ‘simplified’ R&D tax credit scheme
Consultation on a proposed simplified single R&D credit scheme modelled on the existing R&D expenditure credit regime for all claimants.
Consultation on significant changes to R&D tax reliefs
The Government has launched a new consultation on further changes to the research and development (R&D) tax relief regimes with the aim of merging the two existing schemes into a single, simplified scheme based on the current R&D expenditure credit (RDEC) scheme. The consultation runs until 13 March 2023 and the stated objectives are tax simplification, ensuring value for money for the taxpayer and tackling abuse, to potentially come into effect from 1 April 2024. Further details and points for consideration are detailed in this article.
Overview of single tax credit regime
The Government is consulting on the potential introduction of a single, simplified above the line credit regime which would apply to all claimants irrespective of company size. The proposed regime would be modelled, as far as possible, on the existing RDEC scheme with a credit being calculated as a percentage of a company’s qualifying R&D expenditure. The credit itself would be taxable and would be a similar benefit to both profit and loss makers. A decision on the proposed rate for the single credit regime would be made later and subject to limits on the overall cost envelope of the regime. The consultation asks for views on a more generous relief for targeted types of R&D or R&D intensive companies (further details included below).
Currently there are two R&D tax relief regimes available:
- Small and Medium Enterprises (SME) scheme: an additional 86 percent tax deduction (from 1 April 2023) for qualifying R&D costs. For loss makers this deduction can be surrendered for a 10 percent tax credit (from 1 April 2023); and
- RDEC scheme: a taxable ‘above the line’ 20 percent credit (from 1 April 2023) on qualifying R&D costs for large companies and SMEs that aren’t eligible under the SME scheme.
Subcontracted R&D activities
One of the key differences between the existing RDEC and SME regimes is the treatment of R&D activities that are subcontracted from one party to another. The rules are designed to prevent two parties from claiming relief for the same R&D expenditure.
The consultation proposes a single set of rules and asks whether the existing SME or RDEC rules should apply or an alternative model be adopted. Under SME rules companies could claim for payments to subcontractors to conduct R&D and the subcontractors would not be able to make a claim. Under RDEC rules payments for R&D subcontracted to another party would not be eligible for claimants, however the subcontractor would be able to make a claim. Essentially in an arrangement where one party (customer) subcontracts R&D to another party (subcontractor), the question the Government is posing, is which party should be entitled to make a claim under the proposed single credit regime.
Cap on Payable Credits
The existing RDEC and SME schemes both include caps on the level of payable credit that can be received by claimants. The purposes of these caps is to limit fraud and to reduce the availability of credits for overseas companies with a limited UK presence. Both caps are based on the PAYE and NIC liabilities for relevant workers and the SME cap includes a number of additional exemptions. The Government intends to implement a similar PAYE/ NIC cap for the proposed single R&D tax credits regime and has asked for feedback on the design of the cap as well as any simplifications that could be introduced.
Additional targeted support
The Government is also consulting on whether there should be additional targeted relief for different types of R&D or for R&D intensive companies. This may consist of differential credit rates for specific types of R&D or for particular sectors (e.g. life sciences). These proposals are likely a response to the concern raised by SME claimants following the reduction to the super deduction rate from 130 percent to 86 percent from 1 April 2023. Although this rate change was introduced to reduce abuse of the SME scheme it has also resulted in genuine SME claimants being disadvantaged. Consequently, an approach to target additional relief to particular sectors may provide a measure to address these concerns.
Qualifying Indirect Activities
Following the Budget 2021 consultation, the Government has again requested feedback on the eligibility of Qualifying Indirect Activities (QIA). The consultation points to the fact that the QIA rules are often complicated to apply, and this makes them prone to ‘boundary pushing’. As a result, the Government may be looking to restrict the eligibility of QIA activities as part of the design of a single R&D credit regime.
The Government is also considering the introduction of a minimum qualifying expenditure threshold for R&D claims. It would appear that this is in response to a large increase in the number of small claimants with the consultation document outlining that “over 50 percent of claims in 2019-20 were worth £25,000 or under”. The Government has indicated that the introduction of a minimum threshold may deter spurious low value claims and prevent fraud. However, the Government has also indicated that they are mindful of the negative impact that a minimum threshold may have on some businesses (e.g. startups).
What should claimant companies consider?
The introduction of a single simplified R&D credit regime to replace the existing SME and RDEC regimes would result in a significant structural change to the UK’s R&D tax relief regime with implications for all companies. The consultation provides an important opportunity to help shape the design of this regime and the impact of the proposed changes may be significant for existing claimants determining if, how and what they can claim for future years. Claimant companies should consider the impact that the proposed regime may have on their claims as well as any additional changes that should be made to better incentivise R&D in the UK.
If you have comments on the consultation or are concerned as to how these proposals might impact on future R&D claims, speak to your KPMG R&D claims advisor. The deadline for responding is 13 March 2023 and KPMG are interested in your feedback and will be responding to HMRC on these proposed changes.