HMRC Draft Legislation: An Update

HMRC has released draft legislation for consultation, which includes two significant changes, along with some tweaks to the way the R&D tax relief scheme will work in the future.

Firstly, the legislation introduces an increased level of relief for R&D Intensive SMEs (defined as a loss making company, or group of connected companies, whose total expenditure is composed of 40% or more R&D-eligible costs). These companies will be eligible for a payable credit rate of 14.5%, compared to other companies who will receive the new reduced rate of 10%. This measure will take effect from 1 April 2023, with eligible companies able to claim on expenditure incurred after that date. It has been suggested that this will remain available even after the introduction of a potential merged scheme.

On that note, the second significant proposal is for a merged scheme of relief to replace and combine the RDEC & SME schemes. While the eligibility criteria remain broadly unchanged, the announcement has outlined the proposed new rates of credit (still subject to change) and aims to more clearly define some areas of the legislation. Firstly, the rates; the percentage of Qualifying Expenditure translated into a credit will be 20% for most companies, or 49% in the case of a ring fenced trade (defined section 277 of CTA 2010). The credit is now treated in a manner similar to the current RDEC scheme; the above-the-line credit is discharged against any CT liability, after which it is subject to a notional tax deduction and a revised PAYE/NIC cap before any further offsets are made. It is worth noting that the PAYE/NIC restriction will be the more generous cap introduced for the SME scheme, rather than the existing RDEC cap. The exemption from the PAYE/NIC cap enjoyed by the SME scheme is also being extended to the merged scheme for companies engaged in creating or managing intellectual property, such as patents.

Qualifying overseas expenditure restrictions are to remain as previously announced. This step is clearly intended to ensure the funds from a claim are reinvested into the UK wherever possible. It limits the claiming of overseas expenditure to activity that could not be replicated in the UK for reasons such as geographical and environmental conditions, or regulatory requirements. Cost of activity and availability of workers are explicitly disallowed as reasons that the work could not be carried out in the UK. This restriction will apply for expenditure incurred after 1st April 2024.

Finally, companies of any size will now be required to ensure qualifying expenditure is not incurred as part of work under contract to another company. However, both RDECs and SMEs will be able to include qualifying subcontractor expenditure as part of their claim for relief going forward.

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