R&D Consultation announced 13 January 2023

On Friday, the Treasury launched a consultation with the intention of simplifying R&D tax reliefs by merging the current SME and large business schemes.

The eight-week consultation, which runs from 13 January to 13 March 2023, sets out proposals on how a single scheme could be designed and implemented. This would replace the two R&D tax relief schemes currently in place – the Research and Development Expenditure Credit (RDEC) and the small and medium enterprises (SME) R&D relief.

A scheme modelled on the current RDEC for SMEs appears to be highly likely (as predicted previously by many in the industry). HM Treasury are also proposing that R&D contracted to sub-contractors would be claimable only by the sub-contractor and not the R&D principal to make the scheme easier to manage.

The government also intends to implement a PAYE/National Insurance contributions (NICs) cap in any merged scheme and is interested in stakeholder views on how this should operate. A limited form of PAYE cap already exists, and of course the regime was initially set up with such a cap in place.

It is also considering whether to introduce different levels of tax relief based on industry sectors. However, differentiated tax relief for specific R&D would increase complexity and compliance costs, widen the scope for abuse, and potentially could be less effective than direct government spending.

Any variation in support for different companies in a merged scheme will need to account for the relevant subsidy control considerations.

It is also considering whether a minimum threshold for expenditure on R&D should be introduced to limit claims, and potentially to deter abuse of the system – which may indicate why HMRC are currently focusing their audit activity on smaller claims (see below).

The government recognises any reform to the rates creates challenges for some R&D intensive SMEs and those in the life sciences sector in particular and believes there is merit to the case for further support. Any further changes will be announced in the usual way, at a future fiscal event (i.e. the next major event is 15 March 2023, but could be the Autumn Statement).

If implemented, the new scheme is expected to be in place from 1 April 2024.