R&D scheme consultation – what’s next?

At the moment, HMRC is having a consultation regarding a simplified R&D tax scheme to replace the existing SME and RDEC schemes. This proposal is part of the wider reform, already introduced to the UK’s R&D tax regime to ensure that the scheme remains up-to-date, competitive, and well-targeted.

There are many nuances to be considered if this proposal gets approved, including how subcontracted and subsidised R&D will be treated, whether there should be a cap on payable credits, and how to balance competing interests given a fixed pot of support. Views on the design of this potential new scheme are currently being reviewed until 13 March 2013. 

In this blog, we will review the key considerations and latest news from this consultation.

What is being discussed now?

The ongoing consultation seeks views on how a single scheme, which would apply to all companies, regardless of size, could be designed. It’s proposed that this scheme could be modelled on the RDEC scheme which predominantly focuses on large companies. However, the consultation also explores if elements could be taken from both, SME and RDEC schemes, therefore, it is expected that a new scheme will have an impact on all companies, not just SMEs.

The consultation covers changes to design features beyond a change in rate which could impact the amount of support businesses can claim. The expenditure on qualifying indirect activities and the introduction of a potential minimum spend to be entitled to make a claim are under review for potential changes.

In the end, there will be winners and losers from each policy decision. A remaining question over what the rate will be (or will there be differential rates) will be determined once the design of the new the scheme is agreed upon.

What is the timeline?

There is still no decision taken by the government to merge the SME scheme and the RDEC. If the government decides on one simplified scheme, this will be announced at a future fiscal event. Based on Tax Journal by Tolley recent review (Issue 1606, 10 February – R&D reform: a single RDEC lane for all?), the current intention is that it will be in place for accounting periods beginning on or after 1 April 2024.  

What are the advantages of a single scheme?

The RDEC scheme provides certainty at an earlier point as to the exact cash value of the tax credit. This makes it more attractive to investors as the quantum of benefit is not driven by the claimant company’s specific tax profile (tax profits or losses). However, this is not the case for SMEs, as the tax position of the claimant company can result in substantial variations in the quantum of support received.

The other advantage of the RDEC scheme is that it is accounted for as an ‘above the line’ credit in the income statement rather than being included in the tax charge/credit and is often cited by large businesses as providing increased visibility in the decision-making process. This is great for many large businesses where these decision-making processes often take place in boardrooms with a focus on EBITDA. It will be important that SMEs relay their views on whether the impact of an ‘above the line’ credit will impact SME decision-making processes in the same manner or based on other measures such as cash flow.

What’s next

Finerva will be responding to the consultation on the draft guidance and will publish new information regarding the potential unified scheme release as soon as we will receive any updates on the matter. 

We have extensive experience in supporting our clients with their R&D Tax Credits claims. Please get in touch with our advisors if you are looking for support – we’ll be delighted to advise your business.