The Government has published draft legislation setting out details of the proposed single scheme for R&D tax relief covering both SMEs and large companies.
The measures, which are subject to consultation, are set to come into operation from April 2024.
This works effectively as a taxable grant set at 20% of qualifying expenditure that (in most cases) can be set against corporation tax owing or paid in cash, net of a withholding tax at the same level of the main corporation tax rate (now 25%).
The net benefit will therefore range from 15% to 16.2%, depending on the company’s corporation tax rate (higher for companies within the marginal rate tax band). This is lower than the current rate of benefit, even after the reduction announced late last year, and of course much lower than the previous level of up to 33.35% of expenditure.
Despite the overall single scheme proposal, an SME R&D tax credit will remain in place for loss-making R&D intensive SMEs, continuing the concession brought in in this year’s Budget. For these companies (i.e. those with qualifying R&D spend which is at least 40% of overall costs) the maximum benefit is just under 27%.
Historically one of the main differences between the SME and RDEC schemes has been the treatment of contracted R&D.
The intention is to use the SME scheme feature, where payments to subcontractors will be an allowable cost but disallowing R&D activity by the claimant if the company has been contracted to undertake it.
Considering this has been an area of considerable debate and disagreement in recent years it is surprising that the Government is going down this route. It would have been much simpler just to allow R&D work carried out under contract whilst disallowing payments to subcontractors.
If you would like to discuss these changes or any aspect of your R&D claims, please get in touch.