The UK is unique in that it has had two R&D tax credit schemes since April 2013; R&D Tax Credits (SME) scheme launched in 2000 and the RDEC scheme (for larger companies) introduced in 2013. Although the schemes have been widely regarded as a resounding success, the Government plans to reform the policies to ensure taxpayers’ money is spent as effectively as possible while continuing to support the innovation and growth of British businesses.
As part of the reforms, the Government has recently closed a consultation that explored moving towards a simplified, single R&D tax relief mechanism based on the RDEC scheme. Listening to the views of businesses, accountants and trade bodies in how best to design a potential unified R&D tax relief scheme (or ‘RDEC for all’) was a key part of the consultation process.
At the Autumn Statement the Chancellor announced that from 1 April 2023 the research and development expenditure credit (RDEC) rate will increase to 20% from 13%, the small and medium enterprise (SME) deduction rate will reduce to 86% from 130%, and the credit rate will decrease to 10% from 14.5%. These changes were made to broadly align the generosities of the two schemes and to create scope to simplify the frameworks and merge the schemes in the future.
What is the case for a unified R&D tax relief scheme?
The UK has one of the most generous R&D tax relief systems in the world and we spend, as a percentage of GDP, more than any other country in the OECD. Since 2007 spend has increased from 0.05% to 0.34% of GDP in 2019. Despite this, the level of investment in R&D by UK businesses has lagged behind other countries.
Evaluations published by HMRC show that while the RDEC scheme generates £2.40-£2.70 of additional R&D expenditure for each £1 of tax relief claimed, the SME scheme generates just £0.60-£1.28. HMRC has reported that the estimated level of error and fraud within the R&D tax relief schemes in 2021/2022 was £469m or 4.9%; comprising of £430m (7.3%) for the SME scheme and £39m (1.1%) for RDEC. The fact that the SME scheme costs more to fund than RDEC and has grown at a faster rate over the past several years has prompted the Government to re-evaluate the design of the schemes with a focus on unification and efficiency.
Merging R&D schemes under RDEC
Of course there are those that are in favour of unifying the two schemes and those that are against it. Those in favour cite that the UK is unique in having two separate schemes for SMEs and large businesses, that unification will help with overall tax simplification and that receiving relief as an “above-the-line-credit” will help decision making and allow SMEs making small profits to carry forward previous year losses. Those against unification are concerned that it will result in equalisation of rates of relief and that the disruption caused would not be worth the effort.
The Government is interested in feedback from a wide range of sources including individuals, companies, representative and professional bodies. Subject to the final decision to merge schemes.
Once the Government has decided whether to merge schemes and has created a single scheme design, a final rate will be decided and announced at a future fiscal event. It is currently the Government’s intention that, if implemented, the new scheme will be in place for expenditure incurred from 1 April 2024.
R&D Tax Relief changes coming into effect on 1st April 2023
The Finance Bill 2023 is due to come into effect on 1st April 2023 which contains legislative changes that will affect technical aspects of the R&D Tax Relief (SME) and RDEC schemes. The legislation will be applied to companies making claims with accounting periods beginning on or after 1st April 2023.
The Spring Budget 2023 contained measures that supersede some of the R&D tax relief scheme changes that were due to come into effect from 1 April 2023. Most notably, the restrictions on claiming expenditure for overseas contractors have been pushed back to April 2024. Read more about the Spring Budget 2023 announcement.
If you have any questions about the reforms, R&D tax relief in general, or how to make a claim, contact our tax professionals on 0161 904 0044 or email@example.com.