The government has suggested merging the two research and development (R&D) tax relief schemes to reduce complexity and mitigate fraud, while seeking to improve efficiencies in generating investment.
HM Treasury’s consultation on R&D relief seeks views on the consolidation of the SME research and development (R&D) scheme and the research and development expenditure credit scheme (RDEC), aimed at larger companies.
ICAEW’s response, which can be found in ICAEW REP 17/23, raised concerns that SMEs, including start-ups, will be disproportionately affected by the proposed changes. These would come at a time when SMEs are already disadvantaged by the cost of living and energy crisis compared to their larger competitors.
Commencement and managing change
ICAEW members were not opposed to an RDEC -style ‘above the line’ scheme, but stressed that companies are facing a lot of tax changes. For many SMEs, this would be an entirely new method of claiming R&D tax relief.
Smaller entities are less likely to have significant designated tax resource to manage these changes. Therefore, education and guidance will be imperative to assist these businesses to manage the change and maintain compliance.
Members believed that the proposed April 2024 date for its introduction should be delayed. A reasonable commencement period is required to ensure that education and guidance can be provided.
SMEs have also experienced a significant amount of change in quick succession. For example, there has been no time to assess the impact of overseas restrictions before the rates of relief change. Now there is a consultation on an SME scheme redesign. This makes the impact of the changes difficult to evaluate.
There were mixed views with no clear consensus around who claims relief when work is contracted out. Both options suggested in the consultation offer advantages and disadvantages. It recognised that if the policy intent is to influence investment and drive behaviours, the customer should likely obtain the tax credit as the instigator of the project and having made the investment.
Members also accepted that SMEs were more likely to subcontract R&D. This is particularly true of start-ups, where it is unusual to have the resources in-house. Any move away from giving R&D tax relief to the customer could negatively impact SMEs. On balance, ICAEW’s Tax Faculty suggested that the customer should claim the relief. However, it flagged the complexity of ensuring that the work undertaken by the contractor was qualifying R&D under this route. This may cause compliance challenges.
The Tax Faculty believes the government should consider introducing a transitional rule to permit a joint election to apply the old rules for a finite period. This would mean that any long-term contracts negotiated under the old rules could continue undisturbed. This would manage the commercial disruption arising from any changes.
Most members felt that a mechanism to provide extra support to certain industries would be welcomed. This includes public interest sectors such as life sciences, which tend to have an expensive funding requirement and longer maturity period. This can make it difficult to attract private equity investment.
De minimis threshold
Members were not averse to introducing a de minimis threshold for claiming relief. They suggested that for this to have any significant impact, it would likely need to be larger than £25,000. Some members suggested a threshold in the region of £50,000.
However, such a move would need to be balanced through a further policy initiative to support fledgling R&D projects. Many members suggested that a grant system should be implemented. Grant payments tend to be subject to more rigorous due diligence. A cash injection would likely encourage investment more effectively than a tax credit scheme.
ICAEW’s Tax Faculty will continue to work with members and HM Treasury on policy developments in this area.
ICAEW’s Tax Faculty is recognised internationally as a leading authority and source of expertise on taxation. The faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.