ICAS responds to a consultation on a single scheme for R&D tax relief
By Susan Cattell, Head of Tax Technical Policy
3 April 2023
Susan Cattell outlines the ICAS response to a consultation on a single scheme for R&D tax relief.
As part of the R&D tax reliefs review, a recent HMRC and HM Treasury consultation set out proposals for a single scheme for R&D tax relief, to replace the current two schemes – the SME scheme and the R&D expenditure credit (RDEC) scheme. The consultation invited views on the design of the potential single scheme. It also asked whether more generous support should be provided for different types of R&D or for more R&D intensive companies.
Spring Budget - Additional Tax Relief for R&D intensive SMEs
Shortly after the consultation closed, the Chancellor announced in the spring Budget that additional R&D tax relief will be provided for eligible R&D intensive SMEs.
A new credit rate will be available to loss-making companies whose R&D expenditure constitutes at least 40% of total expenditure. Qualifying companies will be able to claim a payable credit rate of 14.5% for qualifying R&D expenditure, instead of the 10% credit rate for companies claiming support under the existing R&D SME scheme.
The changes will take effect from 1 April 2023, with eligible companies able to claim once legislation is in place. Draft legislation is expected to be published for technical consultation in summer 2023.
Spring Budget – update on the consultation on a single scheme
The government noted that the consultation on merging the RDEC and SME schemes had closed on 13 March 2023; the responses were being considered and no decision has been made. The option of implementing a merged scheme from April 2024 would be kept open. However, the government went on to say that draft legislation on a merged scheme would be published for technical consultation in summer 2023, with a summary of responses to the consultation. Any further changes as a part of the ongoing R&D tax reliefs review would be announced at a future fiscal event, including a final decision on whether to merge the RDEC and SME schemes.
ICAS response to the consultation
Our response supported the government’s aim to introduce a simplified, single relief based on the current RDEC scheme. The complexity of the current schemes can cause difficulties for claimants and HMRC.
We have received extensive feedback from members about the problems caused by some agents offering R&D claims services – generally, these agents are not members of professional bodies. In many cases, the claims do not appear to have any sound basis. Due to the complexity of the rules, it can be difficult for companies to understand that a legitimate claim cannot be made, which gives rise to issues for members of professional bodies, whose clients are approached by such agents. It can often also cause problems for the businesses making the claims, where the agent has disappeared by the time HMRC challenges them.
More generally, we support simplification because complexity increases costs for both taxpayers and HMRC. Complex tax reliefs tend to generate uncertainty and disputes, diverting both HMRC and business resources.
Other key points from our response included:
Subcontracting
We agreed that the same treatment should apply to all claimants in the merged scheme. This is an important opportunity to remove a major source of the complexity from the existing R&D reliefs. Broadly, we consider that the objectives of simplicity and certainty would be best served if the default position was that the subcontractor is permitted to claim, but with provision for a joint election for the contractor to claim instead.
PAYE/NICS cap
We support attempts by the government and HMRC to reduce fraud and abuse arising from R&D relief. We therefore favoured the inclusion of a PAYE/NICS cap in a new merged scheme. However, it is important that genuine UK-based R&D intensive companies are not adversely affected. This could be achieved by adopting the SME approach to the cap, ie £20,000 plus 300% of total PAYE/NICs liability for the period, with some exemptions.
Additional support for different types of R&D or R&D intensive companies
We were not in favour of providing additional support via the tax relief scheme because it would undermine the simplification benefits arising from having only one scheme. It would also cause confusion and potentially disputes with HMRC around whether something fell into one of the ‘special’ categories.
Pre-trading periods
The consultation made no reference to the treatment of R&D expenditure in a pre-trading period. The current SME scheme permits an election to be made for the R&D expenditure, plus the additional deduction, to be treated as a deemed loss in the pre-trading period. If the proposal for a single scheme based on RDEC is adopted, this would no longer be relevant. However, given the intention to support innovation, we suggested that it would be helpful for the new scheme to make some relief available in pre-trading periods, when support could be critical.
Qualifying Indirect Activities
We supported the retention of relief for Qualifying Indirect Activities (QIAs). These are well understood by legitimate agents and should be no more liable to boundary pushing than any of the other elements of the R&D definition. Removing relief for QIAs would present considerable difficulties in cases where they can be a significant and essential cost. For example, the cost of calibrating equipment or maintaining Good Manufacturing Practice (GMP) compliant clean rooms for medical research.
Minimum expenditure threshold
The consultation noted that the removal of minimum expenditure thresholds had contributed to the proliferation of low value claims and exacerbated the problems with error and fraud.
We believe that it is not realistic to expect HMRC to be able to tackle abuse successfully with the current volume of small claims. Attempts to crack down by stopping and checking far more claims also cause delays to the processing of legitimate claims. We therefore supported the inclusion of a minimum expenditure level per year to qualify for relief, in a merged scheme.
Statistics provided in the consultation indicated that in 2019/20 over 50% of claims were worth £25,000 or under. A threshold of at least £25,000 would therefore make sense. However, we recommended that this should be combined with other measures (including some provision for pre-trading periods). To avoid disadvantaging start-ups, we suggested that consideration could also be given to allowing businesses to claim relief once cumulative expenditure in the pre-trading period/first three years of the business had reached the threshold – although this would add a degree of complexity.
Let us know your views
We welcome members’ input on consultations or other tax-related matters – email tax@icas.com to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by members.