As you may have seen, HMRC released draft legislation for the proposed merged R&D regime last week and we had a Communication Forum session with them yesterday to find out a little more behind their proposals. Focusing on the areas that will potentially be of interest, the key points to note are as follows:
New merged R&D regime
- Essentially, the new regime will look and feel a lot like the current large company RDEC regime (with a new name).
- The credit value is proposed as a 20% gross credit, which after Corporation Tax at 25% gives a net credit of 15% (as for RDEC today).
- The current SME regime permits subcontractor costs to be claimed. Comparably RDEC only allows R&D contracted to qualifying bodies. In aligning the regimes, it is proposed that all companies will be able to claim subcontractor costs, albeit restricted to UK providers unless it is ‘qualifying overseas expenditure’ (necessary R&D conditions not present in the UK, eg due to regulatory requirements).
- To ensure only one company can claim for the R&D (avoiding overlap / duplication of claims), R&D that is contracted by another UK party will not now qualify. R&D contracted by an overseas party will still qualify. The draft legislation suggests that subsidised (grant funded) R&D will also not qualify however HMRC indicated otherwise in recent discussions so this may be an oversight.
- A PAYE/NIC cap will be retained being the more generous SME version (£20k plus 3x PAYE/NIC). Given error and fraud issues, HMRC feel now would be the wrong time to remove the cap.
- The 7-step repayment process will be retained. Whilst this is complex, and problematic for some US inbounds, it seems HMRC have too many other concerns to deal with.
- Qualifying indirect activities (‘QIAs’) will continue to qualify.
- The new merged regime will not be a state aid (as it will be available to all).
- A decision regarding the timing to introduce the new regime has not been made – this will become clearer with the Finance Bill this autumn. As things stand, April 24 feels like a stretch.
New intensive R&D regime
- In parallel with the merged regime, an “intensive” scheme will continue to be available to SMEs, operating as the current SME regime does.
- To qualify, a company’s qualifying R&D expenditure must amount to at least 40% of its total relevant expenditure for the period.
- The cash value to a loss making SME is a 27% credit (increased from the standard SME credit of 18.6%).
- HMRC estimate that 20k companies will benefit from this at a cost of £500m (by 27-28).
Our reflections
- The tax simplification aim at the heart of a merged regime is not met by then introducing a second SME ‘intensive R&D’ regime. This takes us full circle with most SMEs losing out in the process.
- Large companies should benefit overall as UK-based subcontractor costs will now qualify, albeit some will lose out due to new overseas cost restrictions.
- It would be fair to say that the draft legislation is still very draft, even ‘square bracketed’ in places. HMRC needs input from taxpayers now to shape the draft legislation so that it is fit for purpose.
- Contracted R&D and the subcontractor rules are a critical area to get right. This is also an area of extreme ambiguity given HMRC’s change in approach, change in Guidelines and a number of cases due to be heard at First Tier Tribunal later this year. Until we have further clarity and alignment on this, rushing new legislation in from April 2024 feels foolish.
Feedback on the draft legislation is encouraged between now and 12th September.
Do get in touch if a call to discuss would be helpful or you would like any help in formulating a response.
