Reforms ahead for R&D and audio-visual reliefsby
In his Autumn Statement the Chancellor announced further reforms to research and development reliefs to prevent abuse. He also announced a consultation into creative-sector reliefs.
There are already proposals for reforms to the research and development (R&D) relief regimes, with some draft legislation having been published in the summer. The Chancellor commented during his Autumn Statement today that he wanted to further reform R&D reliefs. He specifically mentioned “significant error and fraud” in the small and medium-sized enterprise (SME) relief, suggesting that the generosity of the relief made it a particularly attractive target for abuse. At the same time, he suggested that the R&D Expenditure Credit (RDEC) is better value for the economy but is less competitive internationally.
Accordingly, in addition to measures already announced (which I assume will still go ahead), he announced changes to the rates for the two R&D schemes. These rates will apply to expenditure incurred on or after 1 April 2023.
The rate of super-deduction for the SME relief is to be reduced from 130% to 86% while the rate that losses can be surrendered for payable credit is reduced from 14.5% to 10%.
At the same time, the RDEC rate will rise from 13% to 20%. This increase needs to be considered in the context that the relief is a taxable credit, which means that the increase in the main rate of corporation tax (CT) to 25% would have reduced the effective benefit of the relief without a rate increase. That said, the increase to 20% was somewhat more than would have been necessary just to account for the rise in the CT rate (an increase to 14% would have been sufficient).
The new SME super-deduction rate of 86% is interesting. The first thing that springs to mind is “why not a round 85%?” My guess is that this is about closing the gap between the two schemes, although there is still a very slight advantage for the SME relief versus the RDEC. A profitable small company subject to the new small company rate of CT (19%) will now have an effective benefit of 16.34%, whereas the same SME required to claim under RDEC would have a benefit of 16.2%. A large company (subject to the main rate of 25% corporation tax) would have an effective benefit of 15%.
The reduction of the rate of relief for SMEs was not completely unexpected. There have been many voices suggesting that the relief is too generous in comparison to the economic benefits for the country. It is also a fair assessment that its generosity has made it a target for abuse.
The package of changes will help with the plan to move to a single scheme (based around RDEC) for all sizes of company. A consultation on the design of such a scheme will be launched in due course. A move to a single scheme sounds attractive in terms of simplicity but any attempt to have different rates for SMEs and large companies may make that harder to achieve.
The UK has a suite of eight creative-sector reliefs, five of which are collectively referred to in this consultation as audio-visual reliefs. These are film tax relief (FTR), animation tax relief (ATR), high-end TV tax relief (HETV), children’s TV tax relief (CTR) and video games tax relief (VGTR). A consultation has been launched today to consider these reliefs and ensure they remain competitive and enhance the industry within the UK.
There are three broad areas being considered.
1. Simplify the film and TV reliefs by merging FTR, ATR, HETV and CTR into a single credit scheme. This reflects the existing overlap between the schemes.
2. Modernise HETV. Three areas of the relief are being looked at: the minimum slot length requirement, the definition of documentary and the minimum expenditure level.
In terms of the slot length, two proposals are identified, either removing the minimum altogether, or reducing it to 20 minutes but more clearly on an episode-by-episode basis (which was always the intention).
The relief is currently available for dramas or documentaries and the lack of clear definition of a documentary has led to concerns around boundary pushing. The aim is to clearly define what is meant by a documentary and views are sought on what this definition might look like.
The consultation is considering the possibility of increasing the minimum expenditure requirement to maintain the incentive nature of this scheme. The concern is that, with rising production costs many programmes are falling within the relief that might have been commissioned regardless.
3. Modernise VGTR through possible changes to legacy EU conditions. This is likely to result in more of the expenditure having to be incurred in the UK rather than in Europe.
The consultation will run until 9 February 2023.
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I am an independent specialist adviser on the taxation of innovation, advising companies and other advisers on areas such as R&D tax relief, Patent Box and Creative Industry reliefs, as well as IP tax issues more generally.
Formerly a Tax Partner with KPMG LLP (UK), I left in 2011 to establish Aiglon Consulting.