HM Treasury has launched a consultation on the design of a potential single research and development (R&D) tax relief scheme. Replacing the existing scheme for small and medium-sized enterprises (SMEs) and the R&D expenditure credit (RDEC) scheme aimed primarily at larger companies, the proposed single scheme would be based on the RDEC scheme.

Both existing schemes have been subject to a series of reforms, many taking effect from 1 April 2023. These include changes in the headline rates of relief which are already bringing the two schemes somewhat closer together.

The consultation highlights a high level of error and fraud in R&D tax relief claims, particularly so for the SME scheme, and the lower level of incentivisation of R&D activity achieved by the SME scheme.

Two main options are proposed:

  • Adopting SME scheme rules for all taxpayers: large companies would then be able to claim for qualifying payments to any subcontractors, which they currently cannot. Conversely, subcontractors themselves would not be able to claim, nor those whose R&D is subsidised (e.g., by a grant).
  • Adopting RDEC rules for all taxpayers: payments to subcontractors would not qualify for relief, but subcontractors could claim, as well as potentially those with subsidised R&D. It is suggested that this would simplify one of the more complex aspects of R&D tax relief claims and this approach overall is framed as the preferred option.

The consultation also proposes the introduction of a cap on claims based on PAYE/NI contributions as well as considering different levels of tax relief for different industry sectors. However, no specific rates of relief for the proposed new scheme are covered in the consultation.

The consultation document is available on GOV.UK (link), with responses invited by 13 March 2023. If the two schemes were to be merged, the consultation proposes that this should apply to accounting periods starting on or after 1 April 2024.

If you have any questions or concerns about the proposal, or are considering submitting a response, your usual DSG contact will be happy to provide further advice.