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RandDTax

Consultancy, Accountancy
http://www.randdtax.co.uk/

Government Launches R&D Consultation on a Single R&D scheme.

R&D Tax Reliefs Review. Consultation on a single scheme.

https://www.gov.uk/government/consultations/rd-tax-reliefs-review-consultation-on-a-single-scheme

HM Revenue & Customs have launched a consultation based on creating one unified R&D scheme for companies of all sizes. At present two schemes exist with similar rules in some areas but which are completely different in other areas, the SME scheme is often called R&D Tax credits (Correctly you should add “and reliefs”, but I will use the shorthand “SME scheme”) and the large company scheme known as RDEC. Where the schemes differ significantly is in the calculation with the SME scheme involving “below the line” tax relief with the potential to claim a payable credit and the RDEC involving an “above the line” and therefore taxed credit against corporation tax with the potential for loss making companies to claim a payable credit.

The key areas being considered, relate to either the differences between the two schemes or areas where a unified scheme could potentially improve or clarify both schemes.

The three principles behind reform are or at least should be:

  1. The R&D scheme should drive innovation and economic growth. Known as additionality, the additional benefit to the economy from the expenditure.
  2. The scheme should be simple to use, and easy to understand.
  3. The scheme should be a good use of taxpayer money.

Key areas being looked at include:

Is RDEC the best calculation approach? The benefit derived from both schemes come in part from the company tax position, e.g., profit or loss, and claims can be in cashflow terms worthless if a company has large historic brought forward losses, then becomes profitable. This is because both R&D schemes involve tax relief in some form and other forms of relief can interfere with that and just mean one relief replaces another with no immediate cash benefit. What would be better and clearer would be a simple relationship between a company’s qualifying expenditure and R&D credit that does not depend on the company tax position. For example, £100k of R&D expenditure always generates a £25k tax credit. Such clarity would be fantastic as at present it would take several paragraphs to explain all the potential scenarios on both schemes and most non specialists would be quickly lost.

Subcontracting. Subcontracting to other companies is claimable by the company paying for the R&D under the SME scheme, but not under RDEC when the subcontractor is another company which cannot be claimed as opposed to individual a partnership of individuals, or qualifying academic body which can. Therefore, a change to one scheme would be massively disruptive to some types of claimants and could have unpredictable financial impacts. For example, it is not unusual for an SME claim to include 4 or 5 subcontracting companies. If the company paying for that R&D claim could no longer claim those costs it would be hurt financially. But those companies being subsidised to do R&D could make the claim themselves if the adopted policy is RDEC for all. As subsidy is not a restriction on an RDEC claim but is a restriction on an SME claim.  So RDEC for all could mean a lot more SME R&D claims, perhaps several times more. But equally applying the SME rules to a unified scheme would be disruptive as presently under RDEC SMEs subcontracting for large companies can claim for that work under the RDEC scheme. A change to the SME rules would mean those SMEs could not longer claim but the large companies paying for the R&D could.

Caps on Payable R&D Tax Credits and RDEC. This again is a problem area. RDEC for all would mean a cap on a payable credit for loss making companies of the PAYE and NIC on R&D staff this is smaller than the current SME cap. This would mean a lot of loss making SME start-ups who rely on subcontractors for cost reasons could not get any immediate cash benefit from an R&D claim. This would hurt additionality and innovation. It would be more sensible to apply the SME cap of payable tax credits to the RDEC scheme of 3 times PAYE and NIC plus £20,000. Where even an SME that entirely relies on subcontractors can gain £20,000 in cash.

Different rates for different types of R&D or more Intensive companies. Grants are already used to encourage specific areas of R&D and it would appear that trying to create new R&D rules that focused on areas could be open to interpretation. It is a strength of the schemes at present that anyone that meets the R&D Guidelines can claim. Complicating qualification further goes against objective 2 of simplification.

Qualifying indirect activities. Providing this did not amount to a cut in R&D support, e.g., the rates were adjusted. I would have no problem in focusing claimable expenditure more clearly by disallowing these costs. Or even, just saying that claimants can increase direct staff qualifying expenditure by let’s say 5% to account for qualifying indirect activity. This is a grey area open to interpretation and clarification would be welcome.

Thresholds. This would mean claims would need to be over a certain size to be valid, e.g., £25k qualifying expenditure. One of the most ambitious R&D projects I have seen involved one man working from his garage. Unfortunately, he is yet to build a British Apple which also started in a Garage. I don’t like the idea of thresholds as they would harm this type of claimant. Thresholds may also encourage fraud and overclaiming. For example, a company with £20k of qualifying R&D expenditure might just inflate their claim to £25k to get around the cap. It is not dissimilar to stamp duty thresholds in the housing market where around the thresholds some fairly evasive behaviour can perhaps occur to get around jumps in stamp duty.

Conclusion.

A simplified single scheme would be a significant step forward as long as it is not detrimental to claiming companies. SME claims have been somewhat under attack recently and a concern exists that a move towards RDEC for all may be a further stealth cut to the SME scheme as RDEC is in some areas more restrictive and less financially beneficial than the SME scheme. I would urge all interested parties to carefully consider the issues and respond to the consultation by the deadline of 13th March 2023. SMEs are often underrepresented in terms of lobbying Government so real danger exists that a new single scheme due to come in from 1st April 2024 could hurt SMEs.

Christopher Toms MA MAAT – Director RandDTax