New Merged R&D Tax Relief Scheme

The UK Government unveiled draft legislation on 18 July 2023, proposing a unified Research & Development (R&D) tax relief scheme that closely models the current Research & Development Expenditure Credit (RDEC) system.  The new plan aims to serve companies of all sizes under one umbrella from 1 April 2024, (except where the ‘R&D intensity’ condition is met) and whilst JS welcomes R&D tax credit simplification with the proposal having certain merits, it does also raise several concerns that claimant companies should be aware of.

Key Points include:

Unified Scheme

If enacted, this single merged system will replace the existing SME R&D tax relief scheme, for almost all companies, for R&D expenditure incurred from 1 April 2024.

Contracted-Out R&D Expenditure

The draft legislation introduces changes to how contracted-out R&D is treated.  Under the new rules, all companies, including large corporations, can claim relief for R&D tasks they've outsourced, irrespective of the contracting entity.  However, to prevent two companies claiming for the same work, companies acting as a subcontractor will be unable to claim.  This change determines who can claim the R&D tax relief and is predicted to be a hot debate topic.

 Subsidised Projects

The proposed scheme excludes projects that are ‘subsidised’, impacting R&D operations conducted under customer contracts or funded by other group companies. This part of the draft legislation could significantly impact contract research organisations and other projects undertaken for an end customer.

Restrictions on Overseas R&D Expenditure

Starting from 1 April 2024, the ability to claim for overseas R&D activities will be heavily curtailed.  Only activities conducted abroad due to specific geographic, environmental, or social conditions, not replicable in the UK, might qualify. R&D executed overseas due to lower costs or skill availability won't qualify.

Recommendations for Claimant Companies

The draft legislation indicates the government’s inclination towards revamping the R&D tax relief schemes. Companies should assess how these proposed reforms might affect their claims, especially concerning overseas R&D expenditure and subcontracted/subsidised R&D tasks.

The consultation concluded on 12 September 2023, and we will continue to keep you informed of any further updates.

In essence, while the proposals seek to simplify the R&D tax relief scheme, companies need to be aware of its potential implications on their R&D operations and expenditure.

If you’re not up to speed with the changes in legislation, your current R&D service isn’t working for you, or you need assistance with developing your R&D Tax Relief strategy, contact our specialist team at js.tax@jsllp.co.uk, who will help you navigate the changes.