In last year’s Autumn Statement, the government announced that they were to consult on creating “a simplified, single RDEC-like scheme for all”. The news wasn’t unexpected. In 2021, the government commissioned a similar R&D Tax Reliefs Report, which explored the case for consolidating the two schemes into one.
In short, HMRC is exploring the possibility of introducing a simpler scheme that applies to all UK companies, regardless of their size. They’d want this reformed scheme to offer a straightforward above-the-line credit system that streamlines the process of claiming R&D Tax Credits. In other words, they’re weighing up the benefits of merging the SME and RDEC tax relief schemes.
While much is still up in the air, as the government hasn’t taken a final decision, there have already been moves towards consolidating the two schemes. In the Spring Budget, the Chancellor reiterated his intention to reform and simplify R&D Tax Reliefs. Indeed, the April 2023 changes give RDEC a significant boost and partially reduce the generosity of the SME scheme, so that the two R&D tax schemes offered similar levels of relief. SMEs are a vital part of the UK economy, and many rely on tax relief as an essential cash lifeline. There are many risks that the government has to carefully consider to ensure that they don’t disadvantage SMEs and damage their productivity. Yet they have pencilled in 1 April 2024 as the date for the launch of the proposed merged scheme (if they decide to press ahead).
So, why is the government considering a single scheme with such urgency? To help explain the context behind the potential change to a single scheme, we’ve explored the government’s reasoning.
Why is the government considering merging the R&D schemes?
The government is considering merging the schemes into an RDEC-like benefit for several reasons. They aim to:
- simplify R&D Tax Relief
- give more visibility to decision-makers
- drive investment in the UK economy
- make it easier for claimants
- reduce fraud
- deliver value for the UK taxpayer.
Below we explore each of these reasons in more detail.
1) Simplify R&D Tax Relief
The government is on a mission to simplify the R&D Tax Relief. Compared to other countries, the UK is in the usual position of having two R&D Tax Credits schemes, which makes merging the schemes an obvious candidate for tax simplification.
2) Give more visibility to decision-makers
The government believes that RDEC provides clearer information for decision-makers about how much their business will receive upfront. With RDEC, companies receive relief as an “above-the-line credit”. For the R&D SME Scheme, the exact amount of the relief can only be calculated with certainty after the end of the accounting period. The government see RDEC as providing earlier and clearer certainty, helping businesses budget for R&D as well as making it much more attractive to investors who can factor in the credit while making investment decisions.
3) Drive investment in the UK economy
As mentioned above, giving more visibility to potential investors is a key consideration for HMRC, because the government is pushing for more investment in the UK. When they launched their reform consultation, they said the reform aims to “drive innovation and grow the economy.”
Separately, the government has conducted research suggesting that the RDEC scheme is more likely to stimulate private research and investment than the SME scheme, simply because the above the line credit offers greater certainty. These findings will likely to play a big part in the government’s thinking.
4) Make it easier for claimants
When HMRC commissioned an Evaluation of the R&D Tax Relief for SMEs, they found that 18% of SMEs found the process difficult (only 27% said that they found the process easy and the rest were somewhere in-between).
HMRC admitted that there are some ambiguities between the two schemes, which might cause confusion, such as when R&D work is subcontracted. In some other instances, a company may file an R&D Tax Credit claim for the same or multiple projects under both the SME scheme as well as RDEC.
Therefore, the government is looking to reduce these ambiguities and make things less convoluted though having just one scheme which gives greater simplicity.
5) Reduce fraud
HMRC estimates that during 2021-22 the level of fraud and error was at £430 million (7.3%) for the SME R&D scheme and £39 million (1.1%) for RDEC.
These statistics inspire the April 2023 changes to R&D Tax Credits, many of which are designed to prevent abuse of the SME scheme and reduce the chance of errors being made. As the government see RDEC as having a much lower level of error and fraud, this is likely to play a part in their ultimate decision-making.
6) Deliver value for the UK taxpayer
When the initial reforms to R&D Tax Reliefs were announced, the government supported its decision with a note from the Office for Budget Responsibility (OBR), which said that they “expect the reform to save £1.3bn per year by 2027/28”. While the reforms were only a step towards a single R&D scheme, the line from the OBR is revealing – the trajectory of the reforms are expected to save money and deliver better value.
In December 2022, a policy update at the Research and Development Communication Forum reported that:
The SME scheme costs almost twice as much as RDEC and is, as it stands, significantly more generous. Yet HMRC estimate that RDEC incentivises £2.40 to £2.70 additional R&D for every £1 of public money spent, whereas the SME scheme incentivises £0.60 to £1.28 of additional R&D.
Again, it’s clear that RDEC is considered to incentivise more R&D and therefore deliver better value for the UK taxpayer as well as boosting productivity.
This drive to deliver value was confirmed earlier this year, when the Financial Secretary to the Treasury wrote in the R&D Tax Reliefs Review Consultation that any new system would be “underpinned by the effective application of taxpayers’ money”.
What will happen if a merged scheme launches?
The consultation on a single scheme has now taken place, and the government must now weigh up whether or not any reform would benefit the UK economy and if the upheaval caused by such a significant change would be worth the effort.
The government has said that changes will be announced at a future fiscal event, and their current aim is that if they do create a single scheme, it will be in place for expenditure incurred from 1 April 2024. Before this can happen, they will need to announce more details on the design and eligibility for the scheme, along with a final R&D Tax Credit rate.
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