The UK government should take time to design and implement a new R&D tax relief scheme and not rush through legislation, a tax expert has said.
Penny Simmons of Pinsent Masons said that a new R&D tax relief scheme should be accessible to businesses and provide an effective incentive to encourage UK innovation and drive economic growth and there is a risk that rushing through legislation could jeopardise this.
Simmons was commenting after HM Treasury published draft legislation on the proposed design of a single R&D tax relief scheme. The new system would involve merging the two existing R&D tax relief schemes. The government considers that a merged scheme would provide significant opportunities for tax simplification. A decision on whether to go ahead with the merger has not yet been made and will be made at a future fiscal event, the Treasury confirmed.
Simmons said: “The UK needs to ensure that any new R&D tax relief system is effective and accessible to businesses, both large and small, across the UK’s growth sectors. And businesses need certainty about the availability of tax reliefs when making investment decisions. Rushing through legislation risks this. And if the government doesn’t get it right, there will inevitably be further consultation and reforms needed in the future.”
The proposed new scheme is based on the existing Research and Development Expenditure Credit (RDEC) and will provide a 20% tax credit for qualifying R&D costs for eligible companies. The ‘above the line’ credit will be brought into account as a trade receipt, increasing taxable profits or reducing losses, resulting in an effective credit of 15% after tax. Loss-making companies will be able to claim a payable cash credit at 15% capped at £20,000 plus three times the PAYE and National Insurance contributions (NICs) liability of the company for the period. The merged scheme will incorporate the new restriction on claiming tax relief for overseas R&D that is being introduced from April 2024. The draft legislation has been published following a consultation on the proposed new single scheme earlier this year.
“There are positive aspects of the current design of the proposed scheme. The new scheme has adopted some of the more beneficial characteristics of the current scheme for small and medium sized businesses (SMEs) - tax relief for subcontracted R&D costs will be available and the proposed PAYE cap on the value of a cash credit under the merged scheme will adopt the more generous PAYE cap that exists under the current SME scheme,” she said.
“It is also positive that the Treasury has confirmed that the new enhanced tax relief for loss-making R&D intensive SMEs will be made permanent and will operate alongside a newly merged R&D tax scheme,” said Simmons.
The new enhanced tax credit, providing an additional deduction of 86% of qualifying R&D costs is available to ‘R&D-intensive’ SMEs – those that spend 40% of their total expenditure on qualifying R&D. Loss-making R&D-intensive SMEs will be able to claim a higher payable cash credit of 14.5% of qualifying R&D costs, which is worth £27 for every £100 of qualifying R&D costs. The enhanced tax relief was announced by chancellor Jeremy Hunt at the Budget in March and was introduced from 1 April 2023. Companies will not be able to claim tax relief for the same R&D costs under both the enhanced R&D intensive scheme and the newly merged R&D scheme.
“The proposed implementation date of April 2024 for the merged scheme is far too ambitious and may create significant compliance challenges for businesses who will have limited time to prepare. Given that the legislation is only in draft and is subject to change, a final version and accompanying guidance may not be available for many months, giving business insufficient time to understand the new scheme, assess the value of tax relief that may be available and adjust their financial modelling to incorporate the new tax relief. A rushed timetable also creates the risk that the final legislation will contain unintended errors that will need to be corrected in future finance bills, all of which creates unwanted uncertainty for businesses,” said Simmons.
Two UK tax reliefs are currently available on qualifying R&D related costs. Where certain conditions are met, relief is available for SMEs by way of an additional deduction of 86% on R&D costs. Loss-making SMEs may also be able to claim a cash repayment of the tax credit in return for surrendering R&D related losses – this is capped at 10%. The existing RDEC of 20% is primarily targeted at larger companies.
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