This week’s draft legislation to change the UK R&D regime will go too far too fast if it is implemented from April 2024, according to accounting and business advisory firm BDO. Commenting on the draft legislation, Tim Goram-Smith, Associate Director and R&D Lead in East Anglia at BDO, said: “Following the review of R&D reliefs launched in Rishi Sunak’s 2021 Spring Budget, the government has taken many steps to reduce the costs of the UK’s R&D scheme to get better ‘value for money’ – while this is understandable, I’d argue that this latest move is going to prove the most disruptive yet. “Given the very high rates of error and fraud that HMRC now estimates occur under the current SME scheme (£1,060m in 2020/21 compared to just £90m under RDEC1) it is no surprise that if a new combined single R&D scheme goes ahead it will be based on the RDEC rules. However, the government has already changed R&D relief rates from this April and HMRC is imposing new claim requirements, in the form of an Additional Information Form, from 8 August this year to tackle the error and fraud issue. Given all the recent changes, creating yet more uncertainty by changing the R&D regime again for accounting periods beginning on or after April 2024 could risk turning innovative businesses away from investing in the UK. “The current SME and Research & Development Expenditure Credit (RDEC) schemes offer different rates of relief with the SME scheme being more generous – even after the reductions in tax relief from 1 April 2023. Under today’s proposals, many start-up and growing businesses will be concerned that they will get even less tax relief under a combined scheme – although the higher relief for R&D intensive businesses looks set to continue – albeit running alongside the new scheme. “In the long term, many agree that there are practical benefits to aligning the way R&D relief is claimed. For example, the combined scheme would be based on the current RDEC rules which help to raise the prominence of the R&D function within a business by recognising the R&D incentive in a company’s pre-tax income. But the government must remember that not everyone claiming under the current SME scheme is a fraudster – on its own estimates 75% of claimants are compliant and the impact on them of moving to a new combined scheme needs to be managed carefully so as not to damage their growth prospects and the wider economy. “The draft legislation includes design proposals many will welcome. The original proposals on who claims relief where R&D work is subcontracted could have caused problems for many businesses. Thankfully, the draft legislation allows outsourcing costs to be claimed where the work is outsourced to a UK company. Although loss making companies will still be capped on the amount of R&D relief they can claim, the proposals adopt the PAYE/NIC cap currently used in the SME scheme (which is more generous than the RDEC cap). “Probably the most significant downside, is the new rule that any R&D project which is subsidised, (including via a grant), cannot be included in an R&D claim. This will have a wide-ranging impact on many businesses, particularly given HMRC’s recent, extremely broad definition of ‘subsidised R&D’. The new rules will also likely make it impossible for contract research organisations to claim UK R&D relief on work they carry out for client companies. This will change have a big impact on many companies’ pricing and contractual arrangements. “In addition, the rules as drafted could potentially prohibit companies outsourcing work to the self-employed and personal service companies as these companies can only claim such costs if the ‘externally provided workers’ fall within PAYE. “Businesses understand that government will move the goalposts to make it harder for fraudsters to win tax reliefs from HMRC. But making radical changes to tax law at short notice not only creates uncertainty for compliant businesses but also risks introducing new rules with loopholes that fraudsters can exploit further down the line. The government has not made a final decision to push these changes through from April 2024 and I believe the changes should be delayed until at least 2026 so that they don’t damage the R&D investment the relief is supposed to support.”
