01 January 2023
Since their introduction in 2000 and 2002 respectively, the UK has always had different R&D tax incentive regimes for small and medium sized businesses (the SME regime) and large companies (the R&D Expenditure Credit, or ‘RDEC’, regime) – something that makes the UK fairly unique in comparison to other regimes globally.
Building on the previously announced changes to the R&D regimes (due to come into effect for accounting periods beginning on or after 1 April 2023), and the Autumn Statement announcements that brought the tax benefit of the two regimes into closer alignment (reducing the benefit of the SME regime, and increasing the benefit of the RDEC regime), the government announced last week that it would consult on how to combine the two regimes into a single scheme.
In isolation, the changes to the SME regime announced in the Autumn Statement reduced the benefit to these businesses by around a third, leaving most affected businesses and industry groups seriously concerned about the financial impact that this would have, and the message it gave, considering the UK puts innovation at the heart of its industrial growth strategy. When the increase to the main rate of corporation tax from 19% to 25% from 1 April 2023 is taken into account, the SME R&D tax reliefs will be worth 21.5p for every £1 of qualifying expenditure to profitable companies, down from 24.7p currently. The benefit will also fall from 33.35p to 18.6p per £1 for loss-making businesses.
For these businesses, this consultation does offer some positive news in that the government acknowledges the impact of these reforms on ‘R&D intensive SMEs’ and offers the possibility of ‘differentiated levels of support’ to better target businesses in particular sectors, or based on the intensity of their R&D activity. This is a key area for government to focus on, ensuring that support is targeted where it is most needed (and where it will generate the best return on investment by the Treasury in driving productivity and growth).
The suggestion to merge schemes seems a sensible one, and for most claimants, will reduce complexity, and improve visibility of the benefits of making a claim (given that the RDEC credit appears ‘above the line’ in a company’s profit and loss account), which in turn has been proven to drive investment decisions.
As far as the consultation is concerned, the questions asked are also well thought out, and considers how best to align the differing rules of the existing regimes into a single scheme. For example, whether to allow subcontracted R&D to be eligible for relief, and how to apply a cap on payable credits with reference to a company’s PAYE and national insurance contributions paid.
Also interesting is the suggestion of reinstating a ‘de minimis’ value of claim, which is a direct nod to the high levels of fraud and abuse of the system at these lower levels. In our view, this makes a lot of sense, and would go some way to helping focus these reliefs in the right direction.
We are hopeful that this process will help to continue to refine and improve the R&D regimes for innovative businesses in the UK, and RSM, along with other stakeholders, will be responding to this consultation, which closes on 13 March 2023.