Save content
Have you found this content useful? Use the button above to save it to your profile.
How a combined R&D tax relief scheme will affect your clients |AccountingWEB | image of a child with their hair standing on end from static
iStock-RichVintage-impact

How a combined R&D tax relief scheme will affect your clients

by

Recently the government released a consultation on combining the two schemes for R&D tax relief. They want to combine the scheme for SMEs with the RDEC scheme that caters to large companies and some SMEs. Richard Edwards from the R&D Community took a look at the plans.

3rd Feb 2023
Save content
Have you found this content useful? Use the button above to save it to your profile.

We had a look at the consultation document to get a perspective on the proposed changes. Here we outline the key changes we expect to see and talk about how they may affect accountants and their clients.

You can view and respond to the consultation on the Government’s website.

RDEC is going to be the model – in subcontracting and elsewhere

The document makes clear that the RDEC scheme is the intended model for unifying the two R&D schemes. It invites comments on different approaches to subcontracting, an area where the rules are very different between the SME and RDEC schemes. It also states some of the known issues with the RDEC scheme and notes that previous consultations didn’t result in any elegant solutions. 

The impact of unifying the two schemes – particularly if they try to do it by 1 April 2024 – is going to be huge for accountants and their clients. This is arguably the largest change ever made to the rules of the R&D scheme, and the changes will potentially affect every claimant and every adviser.

Why is the government doing this?

The Government seems concerned that their spending on R&D is higher in the UK than in other countries, while business spending is lower.

The UK has one of the most generous R&D tax relief systems in the world, spending, as a percentage of GDP, more than any other country in the OECD. Since 2007 spending 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, even when considering recent revisions in ONS data.
- Section 1.10

Their priority here is likely to be reducing costs rather than ensuring the maximum benefit to businesses. The feeling at The Treasury seems to be that business could be doing more to fund its own R&D, and there is a perception that the RDEC scheme suffers from less fraud and error than the SME scheme. The impact on SMEs is that the majority may have to tighten their belts to compensate for falling rates of relief, while some in the more high-tech sectors might find themselves the beneficiaries of extra Government support.

Qualifying Indirect Activities (QIAs) are on the chopping block

The lack of clarity on the definition of QIAs makes them prone to boundary pushing and as they are supporting activities, rather than direct ones, the Government is considering reforming the rules.
- Foreword

The consultation questions whether QIAs are overly complex and ripe for removal, or whether they are a valuable part of a company’s claim. Reading between the lines, the Government seems keen to reduce the complexity of the scheme wherever it can – so our bet is that these will go. The impact of that on advisers will be good, in that it (slightly) simplifies the costs that can be claimed. However, it will further reduce the relief available to companies, which will be especially unwelcome given the reduction in rates of relief for SMEs.

The Government is in a rush to show it’s in control

Once the Government has decided whether or not to merge schemes and the potential design of the single scheme, a final rate will be decided within the cost envelope of the R&D reliefs and announced at a future fiscal event. This will not be consulted on. It is currently the Government’s intention that, if implemented, the new scheme will be in place for expenditure incurred from 1 April 2024. 
- Section 1.36

HMRC has been criticised for years for its overly lax administration and policing of the R&D tax relief scheme. That, coupled with stories in the national press, seems to have had a big effect recently, with both HMRC and the Government keen to show that they’re proactively tackling the issues of non-compliance. That means they’re not going to be hanging around in making changes, and have proposed unifying the two schemes by 1 April 2024.

However, this doesn’t give much time for businesses and accountants to get ready for the new scheme. Given the concerns we have about the guidance released for consultation in December, we’re also concerned that these more complex changes will not be handled effectively in such a short window. The impact of poor guidance or rules could affect advisers and their clients for the next decade.

Differentiated scheme for specific sectors

The government recognises the reform to the rates creates challenges for some R&D intensive SMEs and those in the life sciences sector in particular. The Government 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.
- Section 1.30

Other respondents wanted the R&D tax reliefs to remain sector agnostic and were opposed to any form of special treatment for certain types of R&D. It was noted that differentiated tax relief for specific R&D would increase complexity and compliance costs, widen the scope for abuse, and could be less effective than direct government spending. 

Separately, and as set out above, at Autumn Statement the Government announced that it would, ahead of Spring Budget on 15 March 2023, work with industry to understand whether and how to provide further support for R&D intensive SMEs following the changes announced at Autumn Statement.

- Sections 3.32-33

The consultation shows that the Government is actively considering whether ‘R&D intensive’ companies should receive more support than those in other sectors.

This one’s hard to predict. It seems the Government is open to a differentiated scheme for different types of R&D companies, while on the other hand, preferring a simplified scheme.  It certainly wouldn’t make sense to merge the two schemes for the sake of simplicity, and then add in the complexity of different companies receiving different types of support or relief. Realistically, in the timespan they’re proposing, this doesn’t seem workable. If they went through with it, it would add a lot of complexity and ambiguity to the scheme – the last thing that most advisers want.

They could reintroduce a minimum expenditure threshold

In response to the previous consultation, some stakeholders suggested reintroducing a threshold to focus compliance resource on higher-value R&D claims to reduce overall error and fraud. This would mean that claims based on expenditure less than the threshold would not be valid. However, this would negatively affect companies with small R&D claims, preventing them from claiming.

The Government is keeping this under review but is mindful of the impact this would have on some businesses and is interested to hear views from stakeholders.
- Sections 3.44-45

If HMRC’s current work to evaluate the scale of error and fraud in the R&D schemes reveals that it mostly arises in smaller claims, this would make a minimum expenditure threshold much more likely. Approximately 30% of claims are below £10k in tax benefit, so HMRC would save a huge amount of time and money if a cap were introduced above this level.

In terms of the impact on advisers and their clients, this would be significant – and negative. Many advisers would find themselves starved of the smaller clients they need to stay in business, and those smaller SMEs would find themselves unable to access a scheme that’s meant to promote technological innovation – unless they were backed by grants or investment.

Is there anything we can be sure about?

So far, the only thing that’s clear is that the Government is determined to make sweeping and substantive changes to the R&D tax relief scheme. This will have significant impacts on the companies claiming relief and on the advisers who help them. It remains to be seen whether HMRC can usher in these changes without introducing an element of chaos. 

 

Replies (1)

Please login or register to join the discussion.

avatar
By flightdeck
06th Feb 2023 14:59

I would have thought the smaller R&D qualifying companies are the most in need of financial support.

Typical backward thinking from the civil service, asking themselves "what would make my life easier" instead of asking "what is the objective of this scheme?" and focusing on how to get themselves behind it. The object is to encourage innovation. Many ideas will start small and early size is no predictor of future value.

Thanks (0)