The government have issued draft legislation for consultation on the proposal to merge the two forms of corporation tax relief for expenditure on research and development (R&D).
For expenditure incurred on or after 1 April 2024, it is proposed that the two schemes providing for R&D relief – R&D expenditure credit (RDEC) and Tax Credit Relief for SMEs (small or medium-sized enterprises), will be merged and replaced with a single unified scheme.
This will operate alongside a new scheme to provide additional relief for “R&D intensive” SME companies.
It is suggested that this merged scheme will operate in a similar manner to the existing RDEC scheme, rather than the SME scheme. The merged scheme will offer a taxable credit, based on a percentage of R&D expenditure, that can be offset against the company’s tax liability. The rate of relief in the draft legislation is 20% of R&D expenditure (although this is the current RDEC rate and HMRC say the rate is a “placeholder” and not decided). This would translate into a net benefit of 15%, assuming a company pays tax at the 25% main rate of corporation tax.
The exception to this would be for loss-making “R&D intensive” SMEs. These companies would be able to continue to claim an additional deduction for R&D expenditure, and where that deduction produces or contributes to a loss, claim a payable credit for that loss.
It is envisaged that the current SME relief will effectively continue for loss-making R&D intensive companies. An R&D intensive company is broadly defined as being where R&D expenditure is at least 40% of the company’s total expenditure for the purposes of calculating profits chargeable to corporation tax. For those companies, the additional deduction will remain at 86%, with the rate of payable credit for surrenderable losses being 14.5%. This provides a repayable credit of £26.97 for every £100 spent on qualifying R&D.
The consultation on the draft legislation has just closed and the response from the Chartered Institute of Taxation focused principally on three key issues:
- April 2024 is far too short a timescale to get the scheme right and ensure it is not open to abuse and/or misunderstanding.
- Maintaining the old scheme for R&D intensive companies is a huge missed opportunity for simplification, and certainly does not constitute a “single merged scheme”. Instead it would make much more sense to use the new merged scheme with a higher rate for R&D intensive SMEs.
- More time should be taken to make sure the rules around R&D being subsidised or subcontracted are clear, as this has been the subject of significant disagreement and several tax cases in recent years.
Contact James Geary or Joe Lock in our Corporate Tax team by emailing james.geary@randall-payne.co.uk or joe.lock@randall-payne.co.uk, or call 01242 776000.
