UK to consult on ‘radical simplification’ of R&D regime

The UK government has launched a consultation to simplify the country’s Research and Development (R&D) tax relief system in a bid to drive innovation and stimulate economic growth.

The eight-week consultation, set to run from January 13 to March 13, sets out proposals for a single programme that would replace the two existing R&D tax relief schemes: the Research and Development Expenditure Credit (RDEC) and the SME scheme.

The new regime would seek to provide decision makers in smaller companies with clearer information to help them set budgets for R&D. In contrast, under the current setup, the exact amount of money a firm will receive from SME tax relief can only be determined at the end of the accounting period.

“We are focused on growing the economy – with thriving businesses bringing more jobs, higher pay and more tax revenue to fund our precious public services,” said Victoria Atkins MP, financial secretary to the Treasury, in a statement.

“Getting R&D tax relief right and fit for the future sits at the heart of making sure the UK remains a competitive location for cutting edge research – helping new firms grow.”

‘Major structural change’

According to Jenny Tragner, director and head of policy at R&D consultancy ForrestBrown, the consultation document mistakenly presents the key areas of difference between the RDEC and SME schemes as “a simple choice between adopting the rules of one or the other”.

“Ensuring that we bring the two schemes together in an effective way that directs relief to the right entity, and best reflects the genuine cost of carrying out R&D, may prove more complex,” she tells Accountancy Age.

Tragner also notes that the consultation sets “a very bold timeline for such a major structural change”, adding that she believes “the period of change and uncertainty over the future direction of R&D tax reliefs is set to continue”.

This is echoed by Emma Rawson, technical officer at the Association for Taxation Technicians, who warns of the risk of adding yet another major change to the R&D regime.

“It is a lot to ask companies and their advisers to cope with yet more changes, especially for a scheme which may cease to exist as early as April 2024.

“We would therefore strongly encourage HMRC and HM Treasury to pause plans for any future changes whilst a decision is taken on the wider future of the R&D regime.“

Rawson does note that a unification of the RDEC and SME schemes would represent a “radical simplification” of the UK’s R&D regime, and that it should be “easier and more efficient” for HMRC to administer.

A rapidly changing regime

The fresh consultation is part of the UK government’s ongoing review of the R&D tax relief system and marks the latest in a series of recent amendments to the regime.

Most recently, as part of his inaugural Budget statement as Chancellor in November 2022, Jeremy Hunt announced the lowering of the SME scheme’s deduction rate from 130% to 86%, and the credit rate from 14.5% to 10%.

The RDEC scheme, in contrast, was subsequently handed a 7% boost (from 13% to 20%).

Just four months prior, HMRC published draft legislation proposing an expansion of qualifying expenditure to include data licenses and cloud services, in addition to extending the scope of relief to cover mathematical advances.

And as part of the Autumn Budget statement in 2021, then-Chancellor Rishi Sunak announced that relief for subcontracted and externally provided work for overseas activity would be excluded from the regime.

If implemented, the latest amendment to the scheme is expected to be in place from April 1, 2024.