The UK government recently launched a consultation to explore ways in which the existing R&D tax relief scheme might be changed to further boost investment in innovation.
R&D tax reliefs have proved extremely popular with business and offer generous corporation tax deductions and payable tax credits. The tax credits are particularly attractive as they can be used even when an organisation is loss-making. The net effect of the reliefs is to reduce the cost of a company’s research and development costs by up to 44% depending on its size.
The kinds of costs that can qualify for R&D tax relief are employee and other staffing costs, utility costs like fuel and water, certain software, volunteer payment in trials and some subcontracting costs. To find out if you qualify and how to make a claim read our guide to the current tax relief scheme.
Regardless of the scale of your business, if you carry out R&D and claim under the scheme you are likely to be affected by any changes. The consultation closed on 2 June 2021.
In this guide, we take a look at the consultation document and explore what impact any potential changes might have.
What is the R&D tax relief consultation?
At the moment, there are two types tax relief available to companies that carry out R&D:
- The Research and Development Expenditure Credit (RDEC). This is aimed at larger companies, but some SMEs can use it too. The credit, that’s worth up to 13% of qualifying R&D costs, is awarded as income and liable to corporation tax
- The Small and Medium-Sized Enterprise R&D Relief (SME) that enables small firms to deduct 130% of qualifying costs from profits, in addition to the usual 100% deduction. If you’re loss-making, you can get a tax credit
The consultation is aiming to look at the impact of the two reliefs in practice, explore the differences between them, and examine whether they are still appropriate given technological developments and current R&D practices.
Why is it happening?
The government recently carried out consultations on the way the R&D tax credit scheme currently operates, both to broaden its scope and to reduce potential abuses of the system.
The most recent consultation, and the subject of this guide, goes further and examines the scheme as a whole. The purpose is to tweak the scheme in order to boost investment – with a goal of achieving investment in R&D of 2.4% of GDP by 2027 – and ensure that the regime is globally competitive.
What questions is the consultation looking to answer?
These are the questions addressed in the consultation:
- Whether there should there be a single R&D scheme rather than two (what HMRC calls ‘RDEC for all’)
- Whether the application process for R&D corporation tax reliefs should be altered, so that more information is given at the start of the claims process enabling advance assurance of approval
- Whether to improve the way HMRC, companies and their agents operate the scheme in practice
- Whether the current definition of R&D is still appropriate, given technological developments since the scheme was introduced in 2000
- Whether the types of costs that are eligible for R&D relief should be altered
- Whether the rates of relief are appropriate
- Whether costs incurred overseas should be included, and how this benefits the UK economy
Expanding the definition of R&D
As part of a first round of consultations, it seems clear that there will be a change in the definition of R&D to include data and cloud computing costs so that these will be qualifying expenditure under the scheme. This issue is being considered in the latest consultation. In addition, know-how and trade secrets (as opposed to simply registered IPR) are being included within the definition of intellectual property.
The government recognises that there are some types of R&D such as pure mathematics, creative work and social sciences that could be included in the official definition of research and development so that attract tax relief. In the consultation, they have asked businesses to suggest other types of activity that might be included.
Two schemes or one? Structure and administration
As part of interviews conducted by the government, it seems that the SME scheme has stimulated investment in R&D, while the RDEC is considered a simpler scheme and businesses value the income this generates.
However, the fact that there are two separate schemes and the complexity involved in claiming, are seen by companies as overly complex. In addition, research has concluded that while SMEs respond positively to the smaller business scheme, the RDEC has the net effect of generating more R&D expenditure and thus stimulating investment in innovation.
In the consultation, the government seeks to understand why this is so, and is asking business to suggest possible reasons and comment on the rates of tax relief that are more generous in the SME scheme.
Research in the UK and abroad
Under the schemes, it isn’t necessary for qualifying expenditure to take place in the UK and things like subcontractor costs can attract R&D relief even if those subcontractors are based abroad. The Office of National Statistics has conducted research that suggests that this overseas spending doesn’t have a knock-on effect of benefitting R&D in the UK to the fullest extent possible.
As a result, the consultation has asked businesses to provide information on how much of their R&D is conducted abroad, and the benefits of drawbacks of this. They also want to know the reasons why companies decide to carry out R&D in other countries than the UK.
How might changes impact your business?
In view of the potential changes flagged by the questions posed in the consultation, here’s our best guess as to how any alterations to the schemes might impact your business.
The RDEC and SME schemes could be consolidated into a single scheme to simplify the process. If you are currently claiming under either scheme, your internal processes may need to change as a result
Simplified application process
It should become less complex to make a claim for R&D tax credits
Broader definition of R&D
If you conduct R&D that currently isn’t covered within the definition of research and development under the schemes, you might find that any alteration works to your benefit, enabling your business to make a claim
Potential limitation of claims relation to overseas costs
If you claim under the scheme for costs incurred abroad, you may find these claims are limited in value in the future
Advance approval of claims
It may become possible to ask HMRC to pre-approve, in principle, your proposed claim
Potential limit or cap on amounts of claims
It’s possible that HMRC may put a limit or cap on claim amounts
Potential expansion of types of qualifying expenditure such as creative R&D
As well as an expanded definition of R&D, the types of qualifying expenditure may also be broadened