R&D tax relief reform – how will reduced rates and increased simplicity impact investment decisions?

Over the past 18 months, we have seen a range of changes to the research and development (R&D) enhanced tax reliefs regime in the UK, in part driven by HMRC’s focus on reducing levels of fraud and abuse in the system. This previous article summarises these changes in more detail.

A crucial point still needs to be concluded: the move to a single UK R&D tax relief scheme (modelled on the principles of the current R&D expenditure credit approach). This is to sit alongside a separate more generous proposed regime for loss making ‘R&D intensive’ small and medium sized enterprises (SMEs) for which more than 40% of their total expenditure is eligible for R&D tax relief. HMRC recently consulted on draft legislation to introduce these changes, inviting feedback from interested stakeholders.

Our overriding concern with the proposals is the speed of implementation, with the intention being to introduce a single scheme from 1 April 2024. Despite this being little over six months away at the date the consultation closed, key elements of the scheme remain unresolved – in particular, clarity over the approach to subcontracted and subsidised R&D. In a recent survey of by RSM UK’s clients and contacts, despite the majority of respondents confirming that R&D tax reliefs were a valuable way to reduce the net cost of investment in new technology, it came as little surprise that over 50% also felt that the recently announced reduction in the rates of relief for SMEs also made it less worthwhile to make a claim. More than half of respondents went on to state that they felt the merged scheme would have a detrimental impact on the claims that they make.

A single R&D tax relief scheme in the UK would certainly bring simplicity (something 65% of respondents agreed with) and would align the UK with most other countries offering R&D tax incentives that have adopted a single scheme. However, there is a risk that the current proposals do not achieve this. Alongside the single scheme, HMRC intends to retain a regime akin to the current SME scheme, available only to loss-making ‘R&D intensive’ SMEs. The threshold of 40% of total expenditure being eligible for R&D tax relief to qualify as R&D intensive is a high bar indeed, and retaining a separate regime appears to add complexity rather than bring simplicity, and for only a limited number of potential claimants. Over three-quarters (80%) of respondents agreed that the new R&D intensive scheme was too complicated, with 50% also agreeing that the eligible expenditure threshold was too high to allow many businesses to claim. 

In summary, it would seem that businesses claiming R&D tax relief should be prepared to embrace further periods of uncertainty and change as the reforms take their course, and early advice should be taken to ensure the impact of these changes is managed.

Despite the feedback around the challenges in the current drafting of the government’s proposed reforms, our survey found that the majority of respondents would not be changing their immediate investment decisions as a result of the proposed changes. This should be seen as very good news at a time where enterprise and innovation are a critical factor in the UK’s ability to strengthen its economy.