Have your say in the R&D tax relief consultation

As noted in our communication sent last month, there is a Government consultation underway for the valuable Research & Development (R&D) tax relief system. This consultation runs until 13 March 2023 and we will be participating in the process on behalf of our clients.If you have a view and would like to provide a comment, please complete our short survey here. This survey should only take a couple of minutes of your time and ensure any of your views are taken into account for our submission.What’s proposed?In summary, the consultation is centred around canvassing opinion on the creation of a single scheme, rather than the two brackets that currently exist: the Research and Development Expenditure Credit (RDEC) and the small and medium enterprises (SME) R&D relief.The consultation has also been announced on the back of increased criticism for the processing delays and system abuses that are impacting legitimate claims from businesses who are in need of the valuable cash injection.We have documented below some of the proposed rule changes that are up for debate.

  1. Subcontractor expenditure

As mentioned above, there are two separate schemes in operation and the Government intends to unify these to make one rule for all claimants.If SME scheme rules are chosen:

  • Under these rules, large companies would be able to claim for qualifying payments to any subcontractor.
  • This could be beneficial to some claimants within the RDEC scheme and make the RDEC scheme more generous by expanding the scope of qualifying expenditure.
  • However, this would prevent subcontractors from making a claim, as well as those whose R&D is subsidised.

If RDEC scheme rules are chosen:

  • Would mean claimants would not be able to claim for payments to incorporated subcontractors, but the subcontractors could claim.
  • It could also mean claimants whose R&D is subsidised, for example by a grant, were able to claim more easily.
  1. PAYE cap

Under the current SME and RDEC schemes there is a cap on the payable credit available to companies based on their PAYE liability in the year. The Government intends to implement a similar cap in any single scheme.Current cap under SME scheme rules:

  • The SME scheme’s cap is more complex than the RDEC cap but allows for a higher relief.
  • Payment is capped at £20,000 plus 300% of its total PAYE and National Insurance Contributions (NIC) liability for the period.
  • The PAYE/NIC liabilities relevant are for all employees of the company, they do not have to be engaged in R&D activity.
  • There are some rare exemptions to these rules:
    • Its’ employees are creating, preparing to create or managing Intellectual Property (IP)
    • It does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by, connected persons

Current cap under RDEC rules:

  • A payment under RDEC is capped at 100% of total PAYE and NICs liability for the period.
  • The relevant liabilities are the company’s staffing costs that consist of PAYE and NIC liabilities in respect of:
    • the employees of the company who are engaged on R&D activity
    • any externally provided workers who are provided to the company by another connected group company for the purposes of qualifying R&D of the claimant.
  1. Entry threshold

When the R&D relief was initially introduced to the tax system a minimum spend of qualifying expenditure had to be made in order to make a claim. The initial threshold was set at £25,000 but this was subsequently reduced to £10,000 before being completely abolished.HMRC have seen an increase in low level claimants over recent years which they believe is where the majority of error and fraudulent activity is taking place.Some have suggested reintroducing a threshold to focus compliance resource on higher value R&D claims to reduce overall error and fraud. This would mean that claims based on expenditure less than the threshold would not be valid.However, this would negatively affect companies with small R&D claims, preventing them from claiming.