Research and Development reform — Consultation on a single scheme
Published 18 July 2023
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Who is likely to be affected
These changes would affect companies that carry out Research & Development (R&D) and claim R&D tax relief under either of two schemes - the Research and Development Expenditure Credit (RDEC) and the small or medium enterprises (SME) R&D relief (companies entitled to the higher rate of SME payable tax credit because they are loss-making R&D intensive firms would not, however, be affected).
General description of the measure
The government published a consultation on a potential merged R&D tax relief scheme, which ran from 13 January 2023 to 13 March 2023. This consultation invited views on the design of a merged R&D tax relief scheme, merging the existing RDEC and the SME relief.
Following consideration of the responses received to this consultation, in order to keep open the option of implementing a merged scheme from April 2024, the government has today published draft legislation on the proposed design of a merged scheme for technical consultation. A final decision on whether to merge schemes will be made at a future fiscal event.
The draft legislation establishes a single R&D relief, delivered in a similar way to the existing RDEC; that is, as an expenditure credit. It differs from the current RDEC however in several respects, most notably that companies will be able, in general, to claim for payments made as part of an R&D project to subcontractors, as is currently possible in the SME scheme.
The draft legislation also uses the more generous version of the PAYE/ NICs payable credit cap included in the current SME scheme, and includes the restrictions on relief for overseas expenditure which will come into effect from April 2024.
Policy objective
The government recognises the important role that R&D plays in driving innovation and economic growth as well as the benefits it can bring for society. Even in extremely challenging fiscal circumstances the government remains committed to supporting R&D.
The government has not yet taken a decision on whether to merge schemes, but intends to keep open the option of doing so from April 2024. This would present significant opportunities for tax simplification, including having a single set of qualifying rules, being able to remove the exceptions for subcontracting to certain types of entity, known as ‘qualifying bodies’.
The government now invites views through a technical consultation on the proposed merged scheme design to ensure that the draft legislation captures the policy as intended. A final decision on whether to merge schemes will be made at a future fiscal event.
Background to the measure
At Autumn Statement 2022 the Chancellor announced that, as part of the ongoing review of the R&D reliefs, the government is reforming the reliefs to ensure taxpayers’ money is spent as effectively as possible.
A consultation on the design of a potential merged R&D tax relief scheme ran from 13 January 2023 to 13 March 2023. The summary of responses can be found here.
The government has today published draft legislation on the proposed design of a merged scheme for technical consultation.
A final decision on whether to merge schemes will be made at a future fiscal event.
Detailed proposal
Operative date
The measure will take effect in relation to expenditure incurred on or after 1 April 2024.
Current law
The R&D tax relief for SMEs is set out in Part 13 of Corporation Tax Act (CTA) 2009.The RDEC is provided for in Chapter 6A of Part 3 of CTA 2009.
Proposed revisions
There are currently two separate reliefs which operate differently in how they give relief and what can be claimed for. This legislation will replace that with a single unified scheme operating as follows:
The draft legislation would amend sections 104A, 104J, 104K, 104L, 104N, 104P, 104Y of in Chapter 6A of Part 3 of CTA 2009 and sections 1039, 1043, 1044, 1045, 1058, 1127, 1128, 1129, 1131, 1134, 1136 in Chapter 2 of Part 13 of CTA 2009.
As the merged scheme would, from April 2024, be operating alongside the additional relief for loss-making R&D intensive SME companies, a new condition will be added at section 1045A to determine whether a company meets the R&D intensity condition in an accounting period for the purposes of sections 1044 and 1045.
A new section (1132A) will be added to define qualifying earnings in relation to ‘Externally Provided Workers’.
A new condition will be added to sections 104E, 104K, 104L (contracted out R&D in RDEC, and contributions to independent R&D) and to sections 1134 and 1136 (contracted out R&D in the SME scheme) that the expenditure must either be UK expenditure or qualifying overseas expenditure.
A new section 1138A will define UK expenditure as that attributable to relevant research and development undertaken in the UK and qualifying overseas expenditure as that attributable to activity undertaken overseas which is necessary due to geographical, environmental or social conditions not present or replicable in the UK. Cost of the work, and availability of workers, are specifically excluded as factors.
Similarly, where a company engages externally provided workers to carry out R&D, expenditure on those workers will only qualify to the extent that those workers’ earnings are taxed through PAYE, or attributable to R&D activity outside the UK that is covered by the new section 1138A.
Summary of impacts
Exchequer impact (£ million)
| 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 | 2028 to 2029 |
|---|---|---|---|---|---|
| — | — | — | — | — | — |
Economic impact
This measure is not expected to have any significant macroeconomic impact.
Impact on individuals, households and families
There is no impact on individuals as the measure only affects businesses.
Equalities impacts
It is not expected that there will be adverse effects on any group sharing protected characteristics.
Impact on business including civil society organisations
The impact on businesses and civil society organisations will be estimated following the final scope and design of the policy. One off costs could include familiarisation with the changes and updating systems to reflect them. There is not expected to be any continuing costs.
The measure is not expected to impact on civil society organisations.
Operational impact (£ million) (HMRC or other)
The estimated operational costs for HMRC are in the region of £4.6m covering both IT and staff costs.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from claims and claim notifications.
The current R&D reliefs have been subject to periodic econometric evaluation, providing a good baseline for future evaluations. HMRC are collecting more information which enables HMRC to better monitor the relief through, for example, clearer data on what is being claimed.
Consideration will be given to evaluating the policy after 5 years of monitoring data have been analysed and collected.