Response to R&D Tax Relief Consultation on a single R&D scheme
At Autumn Statement, the Chancellor announced that, as part of the ongoing R&D tax reliefs review, the government would reform the R&D tax reliefs to ensure taxpayers’ money is spent as effectively as possible, to improve the competitiveness of the RDEC scheme, and to take a step towards a simplified, single relief based on the RDEC scheme. The Government committed to consulting on the design of a potential simplified scheme which ran from 13 January 2023 to 13 March 2023.
The UK R&D Tax Relief scheme is a valuable tool for supporting businesses and driving economic growth. The current system is split into two separate schemes: the SME scheme, which provides generous tax breaks for small and medium-sized enterprises, and the R&D Expenditure Credit (RDEC) scheme, which is designed for larger companies. However, the Government is now considering merging the two schemes into a single, unified R&D Tax Relief scheme.
As part of this process, HMRC has launched a consultation to gather feedback from stakeholders on the proposed changes. The aim of the consultation is to gather insights and opinions from businesses, industry bodies, and other interested parties on the potential benefits and challenges of merging the two schemes, and to identify any potential issues that need to be addressed.
This consultation response will explore the key issues raised in the consultation, including the potential impact of the proposed changes on businesses of different sizes and sectors, the administrative burden of the new system, and the level of support for R&D activities. Ultimately, the responses will provide HMRC with a comprehensive analysis of the feedback received, helping to inform the development of a new, streamlined R&D tax relief system that can better support innovation and growth in the UK.
Our response to the consultation is included below.
1. Do you agree a new scheme should be an above the line RDEC like credit? If not, what alternative would you propose?
Although the RDEC (Research and Development Expenditure Credit) scheme may seem simpler to manage than the SME (Small and Medium-sized Enterprises) scheme at first glance, it’s crucial to design the R&D Tax Relief scheme in a manner that enables businesses of all sizes to access it easily. Since the SME scheme accounts for the majority of expenses and claims, altering its structure could result in significant administrative burdens, uncertainty, and complications.
Our recommendation is to create a new tax relief scheme based on the SME scheme’s foundations, but with a tiered system that links the rate of relief to the company’s size. Under this system, micro (Tier 1) enterprises with fewer than 50 full-time equivalent employees would receive a deduction rate of 150%, whilst small (Tier 2) businesses with 50 to 250 FTEs would be eligible for a rate of 130% and medium (Tier 3) firms with 250 to 500 FTEs would receive a rate of 100%. Large (Tier 4) enterprises with over 500 FTEs would qualify for an 80% deduction rate.Ultimately, the choice of tax relief scheme should depend on the Government’s R&D investment goals and the businesses that will benefit from it. Striking a balance between simplicity and accessibility is essential to ensure that the tax relief scheme is effective and doesn’t impose an undue administrative burden. By adopting a tiered system, the proposed tax relief scheme could encourage businesses of all sizes to invest in R&D, fostering innovation, and driving economic growth and prosperity.2. Does the taxability and subsequent different post-tax net benefits impact your decision making when allocating R&D budgets?
When companies allocate budgets for R&D, the potential taxability and net benefits after tax can significantly influence their decision-making process. Given that R&D constitutes a substantial investment for companies, the tax relief available can play a crucial role in deciding whether to undertake R&D projects. Moreover, the tax relief available can also influence the level of investment that a company makes in R&D.
3. If you use RDEC now, is there anything in your view that should be changed?
To encourage companies to invest in R&D, it may be advisable to remove the cap on PAYE and NIC contributions which presently limits the amount of relief that businesses can claim. Additionally, it may be helpful to review and simplify the 7-step process required for calculating the claim benefit.
4. Do you agree the same treatment of subcontracting should apply to all claimants in the merged scheme?
In a merged R&D tax relief scheme, it is our view that the subcontracting treatment should be targeted at SMEs in Tiers 1-3. Tier 1 subcontracting should be allowed both in the UK and overseas, limited to work carried out in the UK only for Tiers 2 & 3 and prevented in full for Tier 4 claimants. By limiting subcontracting to these tiers, support is focused on companies that need it most, whether due to financial constraints or a lack of skills and experience, yet still allowing businesses to remain competitive.
By prioritising SMEs in Tiers 1-3, we can ensure that the tax relief scheme is designed to support those smaller companies and start-ups which may be less financially stable and have fewer resources to devote to R&D. Additionally, the restriction on the use of subcontractors to work carried out in the UK in Tiers 2 and 3 would encourage companies to invest in local talent and expertise, which can help support the wider economy and drive innovation.
Ultimately, the design of the subcontracting treatment in a merged R&D tax relief scheme should balance the need to support businesses of all sizes with the goal of promoting UK-based R&D activity. By tailoring the scheme to the needs of SMEs, we can help level the playing field and create opportunities for growth and innovation across the country.
5. If so, where R&D activity is subcontracted, do you think that the customer should claim the tax relief, as in the SME scheme, or the subcontractor, the person carrying on the R&D, as in the RDEC?
The company carrying the financial risk of the R&D project should be the one eligible to claim the relief. By targeting relief in this way, we can ensure that businesses are encouraged to take on the risks associated with R&D, which can drive innovation and growth across the UK.
Allowing the company carrying the financial risk to claim the relief also aligns with the principles of the SME scheme, which is intended to support smaller companies and start-ups that may be less financially stable and have fewer resources to devote to R&D. By offering relief to these businesses, we can help level the playing field and create opportunities for growth and innovation.
6. Can you see any positive or negative impacts on your business or sector from the Government adopting either approach?
If the Government introduces a new scheme that simplifies the claim process and provides more generous relief, this could encourage more companies to invest in R&D.
7. Do you have an alternative model you think could apply all claimants in the new scheme? Please provide qualitative and quantitative evidence with your proposal.
In considering an alternative model for the R&D Tax Relief scheme, it is important to take into account the needs and capabilities of all potential claimants. Our proposal aims to strike a balance between simplicity and accessibility, while also targeting relief towards those who need it most.
By creating a new scheme based on the SME scheme’s foundations, we can build on the existing framework that has proven successful in supporting R&D investment. However, by introducing a tiered system that links the rate of relief to the size of the company, we can ensure that relief is targeted towards those who need it most.
For micro-enterprises with fewer than 50 full-time equivalent employees, we propose a deduction rate of 150%, recognising that smaller companies may have limited resources to invest in R&D. For small businesses with 50 to 250 FTEs, we suggest a rate of 130%, acknowledging that they may still face financial constraints but are likely to have more resources to invest in R&D. For medium-sized firms with 250 to 500 FTEs, we recommend a rate of 100%, recognising that these companies are likely to have more resources to invest in R&D. Finally, for large enterprises with over 500 FTEs, we suggest an 80% deduction rate, recognising that they have the greatest capacity to invest in R&D.
8. What are your experiences of the PAYE / NICs cap?
The PAYE/NICs cap has been a concern for some companies that have claimed R&D tax relief under the SME scheme, as it limits the amount of payable tax credit that a company can claim to the total amount of PAYE and NICs it pays to HMRC. This can be problematic for some companies that have low levels of employment but high levels of R&D expenditure, as their total PAYE and NICs liability may be lower than the amount of tax relief they are entitled to claim.
9. Are there any ways the Government could simplify the PAYE / NICs cap whilst ensuring there is protection against abuse?
One possible way to simplify the PAYE/NICs cap would be to introduce a separate cap for R&D tax relief. This would mean that companies would not be limited by their total PAYE and NICs liability when claiming R&D tax relief but would instead be limited by a separate cap that is based on their R&D expenditure. This would ensure that companies are not penalised for having low levels of employment and would help to ensure that the R&D tax relief system is fair and accessible to all companies. At the same time, it would be important to ensure that there are safeguards in place to prevent abuse of the system. This could involve introducing more rigorous checks to ensure that R&D expenditure is genuine and is not being used to inflate tax relief claims. It could also involve imposing penalties for companies that are found to be abusing the system and making it easier for HMRC to recover any tax relief that has been wrongly claimed.
10. Which of the SME and RDEC PAYE & NICs cap should the Government implement in the new scheme?
The SME cap should be implemented.
11. Should the Government change the way either cap is calculated if taken forwards? And if so, how?
One potential change could be to base the cap on the level of R&D expenditure, rather than payroll costs. This would ensure that businesses with a lower payroll costs but higher R&D expenditure could still claim an appropriate level of relief. It may also encourage businesses to invest more in R&D activities.
12. Do you consider the government should provide more generous support for different types of R&D or more R&D intensive companies relative to less R&D intensive companies?
Providing more generous support for R&D intensive companies could be an effective way to incentivise and reward businesses that are making significant investments in research and development. However, it is important to ensure that any changes to the scheme are made in a fair and transparent manner, so that all companies have equal access to the benefits. One way to provide more generous support for R&D intensive companies would be to implement a tiered system as mentioned above.
13. In the event this were to be done, how might this best be achieved within an overall cost envelope?
The simplification and consolidation of the R&D Tax Relief scheme would significantly decrease the administrative burden while establishing a framework for the Government to continually improve and focus the incentive towards generating long-term outcomes, such as creating new employment opportunities and increasing profits, leading to further tax revenue. This consolidation should be viewed as an investment that would also attract overseas companies to establish their R&D centres in the UK. This would not only lead to increased innovation and economic growth but also position the UK as a global leader in research and development.
14. If the schemes are merged do you agree the Government should implement the merged scheme on 'accounting periods starting on or after 1 April 2024?
Our opinion is to delay implementing the merged scheme for businesses until ‘accounting periods starting on or after 1 April 2025’ as this would provide businesses with a clear timeline for when the changes would take effect, allowing them to plan accordingly and ensure that they are able to take full advantage of the new scheme. It is important to ensure that there is sufficient time for businesses to transition to the new scheme, and that they have access to the necessary support and guidance to do so. The Government should also consider whether there are any potential risks or challenges associated with the transition and take steps to mitigate them.
15. How can Government ensure SMEs are supported in the transfer into a new scheme?
To ensure that SMEs are supported in the transfer to a new scheme, the Government could provide additional guidance and support for these businesses. This could include workshops, webinars, and other training resources to help SMEs understand the new scheme and how it differs from the existing schemes.
16. Does claiming for expenditure on qualifying indirect activities influence your decision to undertake R&D?
Claiming for expenditure on qualifying indirect activities (QIA’s) can be an important factor in the decision to undertake R&D as indirect activities usually feed into the R&D process at various stages from planning to deployment. However, we feel QIA’s should be capped, at say 20% of the total R&D expenditure.
17. Do you think a threshold should be implemented? If one was implemented, what level should it be introduced?
Introducing a threshold for R&D tax relief claims could help to streamline the process and reduce administrative burden for both businesses and HMRC. However, it’s important to ensure that the threshold is set at an appropriate level that balances the need to incentivise smaller businesses to undertake R&D with the cost to the Government of providing the relief. In our view, a threshold of £10,000 qualifying expenditure could be appropriate for the new merged scheme or to allow companies with less than £10,000 qualifying expenditure to claim the relief through a streamlined process (claim template form which is not too onerous). However, it’s important to note that any threshold should be reviewed regularly to ensure it remains appropriate over time.