A consultation was held earlier in the year on this issue. Draft legislation has now been published to bring about the change. But no decision has been made so far the legislation has been published to “keep open the option”. A final decision will be made at a future fiscal event, one would assume the 2023 Autumn Statement.
The draft legislation needs considering in detail but my first impressions are:
NEGATIVE. RDEC for all will mean a further cut, from those implemented from 1st April 2023, in R&D support for most SMEs. The rate will be the current RDEC rate of 20%. But as RDEC is above the line and taxed unlike the SME claim relief or R&D Tax Credit practically this means a effective benefit of 15% of R&D expenditure. The current benefit for a profitable SME is about 22%, so the cut is roughly by one third of the current benefit. For loss making SMEs, who are not R&D intensive (40% of total expenditure relates to R&D), the change is not awful a guaranteed 15% versus a range of 8.6%-18.6%. But that still represents a big drop from the previous rates.
CONFUSING. Loss making R&D intensive SMEs will get a better rate but it is unclear exactly what that will be under RDEC to get a net 27% benefit the rate would need to be 36%. The current range is 12.47% to 26.97% so I doubt they would make the higher rate at the top of that range. It also practically creates calculation problems as the RDEC is added to the accounts as income. So a company that is loss making before the RDEC may not be after, and even different rates of RDEC could impact that calculation. I need to dig into the legislation but first pass suggests this might be a headache. It may be better and fairer to apply a better rate to all R&D intensive companies rather than just loss making ones. It would certainly be simpler. This aspect was not part of the consultation.
POSITIVE. I like that the SME cap on payable credits is tabled as part of the new unified scheme. It is fairer to SMEs that the cap is £20,000 plus 3 times company PAYE and NIC as opposed to the RDEC cap of the PAYE & NIC on R&D staff. This helps SMEs with a smaller pay roll.
MIXED BAG. I have a client who is a contract research organisation playing a part in clinical trials around for example new cancer drugs. They claim as an SME subcontracted to do R&D by a large company. If the SME scheme is abolished and the RDEC subcontracting rules change as proposed, to enabling the company paying for the R&D to claim, my client will lose the ability to claim R&D Tax Credits at all. This is negative. But most SME claimants pay subcontractors to do R&D for them and would have lost the ability to claim this if the current RDEC rules applied. So for them this is positive. It is also very positive for large companies as they will be able to claim RDEC on R&D subcontracted to other companies unlike the present situation. In this respect and due to other recent changes large companies are the big winners of reform and SMEs the losers.
The changes work well as a simplification of tax rules. But the area that really needs clarifying the BEIS Guidelines remain unaddressed.
CONCLUSION.
I feel the Government have listened to some extent. It is very early days to be looking at legislation which can change so much on its legislative journey. The idea of one scheme is a good one. But implementation by 1st April 2024 looks very hurried for such a big change. The attack on SME R&D claims continues through this measure. I believe in sticking up for SMEs and that they are important for the UK economy so that is unwelcome.
Chris Toms – Compliance Director RandDTax