With HMRC consulting on abolishing R&D relief for small and medium-sized enterprises ("SMEs") and R&D relief for subsidised expenditure, leaving only a slightly enhanced and less valuable Research & Development Expenditure Credit ("RDEC"), SMEs with R&D programmes and companies with subsidised R&D activities might maximise R&D reliefs by accelerating their activities and expenditure.
The government published draft legislation earlier this year, for the merger of the RDEC and the SME R&D relief.
Whilst no final decision has been made on whether the merger will actually happen, the publishing of draft legislation suggests that the government does intend to proceed with implementing such a combined scheme at some point and that the proposed effective date of 1 April 2024 is a real possibility.
Autumn Statement 2022
The 2022 autumn statement set out that "As part of the ongoing review of R&D tax reliefs, the government is reforming the reliefs to ensure taxpayers' money is spent as effectively as possible. There is significant error and fraud in the SME scheme, with the generosity of the relief making it a target of fraud. By contrast, the separate RDEC credit is better value (to the taxpayer) but has a rate that is less internationally competitive. The Government is therefore rebalancing the rates of the reliefs."
HMRC Consultation
The government then published a consultation on the potential merger which ended on 13 March 2023, and has stated that the publishing of the draft legislation is as a result of consideration of the responses to this consultation. It has not yet been decided on whether to merge and HMRC intends to keep open the option of doing so from 2024. A decision on whether to merge will be made at the next fiscal event and therefore we expect further announcements at the Autumn Statement in November 2023.
What does this mean for future claims?
The proposal has always been described as a merged R&D tax relief scheme, but on examining the draft legislation it appears the proposal is essentially to abolish the more valuable SME scheme, whilst leaving a slightly modified RDEC which;
- On the plus side, this widens payments to subcontractors which are currently restricted for those claiming under the RDEC scheme and provides a more generous PAYE/NIC 'cap' (adopting the cap currently used for SMEs- £20,000 plus 3 times the PAYE and NIC liability for the period covered by the R&D claim), but
- On the downside, excludes any form of R&D relief where a project and/or expenditure is subsidised.
This isn't such good news however, for the smaller start-up businesses engaging in R&D who would get less tax relief under the new scheme and for companies currently claiming under the RDEC scheme as a result of the R&D project/expenditure being subsidised in some way.
If the legislation is implemented as drafted, those companies will now need to choose between grant funding and R&D tax credits if both are available to pursue.
There may however be light at the end of the tunnel for some SMEs because whilst described as a merged scheme, it appears the proposed new merged scheme would run alongside the existing relief for loss-making 'R&D intensive' SME companies (companies with relevant R&D expenditure in a given claim period that amounts to at least 40% of its total relevant expenditure for the period).
In effect, there would therefore still be two schemes; an SME R&D intensive scheme and a slightly enhanced form of the existing RDEC.
With the likelihood of a single combined R&D scheme increasing, SMEs with R&D programmes and any company with subsidised projects might maximise R&D reliefs by accelerating them to take place, where possible, before 1 April 2024.
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