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Draft Legislation On A Merged R&D Tax Relief Scheme Published

Friday 11th August 2023

HMRC has published draft legislation for technical consultation on a potential merged R&D tax relief scheme, merging the existing large company RDEC and SME R&D relief schemes.

Following on from the Autumn 2022 Statement, the government launched a consultation in January 2023 on a potential merged R&D tax relief scheme inviting views on the design of a merged R&D tax relief scheme, merging the existing RDEC and the SME schemes.

After consideration of the responses received to the consultation, which closed in March 2023, HMRC has published draft legislation on the proposed design of a merged scheme for technical consultation. Comments have been invited by 12 September 2023.

The draft legislation establishes a single R&D relief, delivered in a similar way to the existing RDEC scheme, as an expenditure credit. However, it differs from the current RDEC scheme in several respects. Companies will be able, in general, to claim for payments made as part of an R&D project to subcontractors, as is currently possible in the SME scheme.  The draft legislation also uses the more generous version of the PAYE/ NICs payable credit cap included in the current SME scheme, and includes the restrictions on relief for overseas expenditure which will come into effect from April 2024.

Additional tax relief for R&D intensive SMEs is also proposed with a higher rate of payable tax credit for loss-making R&D intensive SMEs. Companies claiming the existing SME tax relief will be eligible for a higher payable credit rate of 14.5% if their qualifying R&D expenditure is 40% or more of their total expenditure, instead of the 10% credit rate for non-intensive companies. This scheme is targeted specifically at loss making R&D intensive SMEs, who will benefit from this payable credit rate change.

A new condition will be added for expenditure to either be UK expenditure or qualifying overseas expenditure. UK expenditure will be that attributable to relevant research and development undertaken in the UK.  Qualifying overseas expenditure includes that attributable to activity undertaken overseas which is necessary due to geographical, environmental or social conditions not present or replicable in the UK. Cost of the work and availability of workers are specifically excluded as factors.

Similarly, where a company engages externally provided workers to carry out R&D, expenditure on those workers will only qualify to the extent that those workers’ earnings are taxed through PAYE, or attributable to R&D activity outside the UK that is covered by the new section.

Once the Government has decided whether or not to merge schemes and on the potential design of the single scheme, a final rate will be decided within the cost envelope of the R&D reliefs and announced at a future fiscal event. This will not be consulted on. It is currently the Government’s intention that, if implemented, the new scheme will be in place for expenditure incurred from 1 April 2024.

If you would like more information on the consultation, please contact Keith Rushen on 0207 486 2378.

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