Merger of R&D reliefs poses tricky trade-offs

The Chartered Institute of Taxation (CIOT) has noted the publication of draft legislation for the merger of the UK’s two different research and development (R&D) reliefs today but warned that the government faces challenges ensuring a merged relief is both simple and fair.

The Institute also notes that the additional tax relief for R&D intensive small to medium sized enterprises (SMEs) announced at the Spring Budget complicates things, as this will mean that there will continue be two different schemes.

Commenting, Ellen Milner, the CIOT Director of Public Policy, said:

“The Government says that it has not yet decided whether to merge the two different R&D schemes but the publication of draft legislation suggests this is more likely than not. The draft legislation also sets out a direction of travel towards a single scheme being an above the line Research and Development Expenditure Credit (RDEC) like credit.

“A single R&D relief scheme could bring benefits but it will not be without challenges and some tricky trade-offs. In particular there is a trade-off between the potential simplification of a merged scheme and policy decisions to provide additional support to SMEs (or some of them) through different rates of relief. This is highlighted by the additional relief for R&D intensive SMEs and the decision to provide this relief, for the time being, through a scheme based on the existing scheme for SMEs. This means there will still be two schemes, although we recognise that some simplification will occur as a result of aligning some underlying concepts and definitions.

“A single scheme with a single rate for large companies and SMEs that do not qualify as R&D intensive will not necessarily be simple or fair for those smaller companies. Complications will arise as a result of the two rates of corporation tax now in place. Additionally we are not persuaded that the reasons for historically giving a higher rate of relief to SMEs generally no longer apply.

“Consequently, whilst we recognise that it would involve additional complexity within the scheme, consideration should be given to having a higher rate of R&D relief for all smaller companies within a single scheme, especially during a transitional period. An approach of different rates would also allow R&D intensive SMEs to be within the single scheme, with a higher rate of relief.

“We remain concerned that planning for a merger of the schemes in April 2024 is overly ambitious. The current pace of change in the R&D relief regime is already challenging for businesses and their advisers, with these proposed changes coming on top of others in the Finance Act passed last week as well as serious ongoing problems around the compliance process for the relief.¹

“The timetable should ensure that the new rules are fully published, and the detail of what will be required from companies is fully available, in good time before the commencement of a new regime. This will minimise uncertainty, which is one of the biggest blockers to investment. In this regard publishing draft legislation at this early stage, and before a final decision has been taken is helpful.

“Consultation on the draft legislation should provide an opportunity to ensure there is clarity around rules such as those relating to subcontractors, which are currently causing difficulty in practice.”