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.