United Kingdom: HM Treasury consults on the design of a single Research & Development tax relief scheme

Potential reform to existing UK R&D tax relief schemes

In brief

HM Treasury (HMT) has launched a consultation seeking views on the design of a single, simplified research and development (R&D) tax relief scheme, merging the existing R&D expenditure credit (RDEC) and the small and medium enterprise (SME) R&D relief into an RDEC-like scheme. The new scheme, if implemented, would apply in respect of expenditure incurred from 1 April 2024.

The integration of the existing schemes with a single approach may have a decisive impact on the future scope and extent of relief available to large businesses and, consequently, they warrant careful attention. The consultation runs until 13 March 2023.



The UK is unusual in having two R&D relief schemes - RDEC and the SME R&D relief. As part of its overall plans for tax simplification, the government has launched a consultation seeking views on the design of a single, simplified R&D tax relief scheme, which would replace RDEC and the SME R&D relief. The consultation runs until 13 March 2023.

This consultation forms part of the government's ongoing review of R&D tax reliefs, and follows other changes announced at Autumn Statement 2022 (i.e., in relation to expenditure incurred on or after 1 April 2023, the RDEC rate will be increased to 20% from 13%, the SME deduction rate will be reduced to 86% from 130% and the SME credit rate decreased to 10% from 14.5% - these rate changes were included in the Finance Act 2023 which recently received Royal Assent).

Once the government has decided whether to proceed with a single scheme and determined its potential design, a rate of RDEC would be decided and announced at a future Budget, with a view to the new scheme being in place for expenditure incurred on or after 1 April 2024.

In more detail

As mentioned above, the government is seeking views on the design of a single, simplified R&D tax relief scheme. This would take the form of an 'above the line' credit (so, would be RDEC-like) so would be broadly familiar to large businesses already using RDEC. It is intended that a scheme based on the existing RDEC scheme would be simpler for claimants, provide greater certainty at an earlier point in time and therefore be more attractive to investors and simplify the tax system.

The main aspects relevant to large businesses that HMT is consulting on are as follows:

  1. Subcontracting - For both the SME and RDEC schemes, R&D relief has historically been available to companies actually carrying out R&D activities. Whereas under the SME scheme, relief can be claimed, in some circumstances, for payments for R&D subcontracted to unconnected parties, this is not possible under the RDEC scheme. Accordingly, R&D structures have been designed around these rules.

HMT poses the question of whether UK R&D sub-contractors should in future continue to be able to claim RDEC in respect of R&D performed for others on a contract basis for an IP owner, or whether this should be switched so that an IP owner is able to claim RDEC in respect of R&D subcontracted out to any third party to perform (currently not permitted for large businesses, but available for SMEs).  This question is central to many multinationals' R&D model and is directed at whether RDEC will in future be limited to R&D spend incurred by UK IP owners, whether directly or contracted out to UK subcontractors, excluding relief for UK contract R&D service providers for foreign IP owners.  HMT is asking for views on this policy choice and, in particular, invites views on alternative models.

  1. Cap on payable credits - The RDEC and SME schemes contain caps on the tax credit payable based on the company's Pay as you Earn (PAYE) and National Insurance Contributions (NIC) liability. These caps are intended to limit opportunities for fraud, and to prevent overseas companies with little or no UK presence from routing activity through UK simply to obtain the tax credit.

HMT is asking for views on how to compute the future PAYE / NICs cap in any merged scheme - with a suggestion that it is open to considering a looser cap closer to the current model that applies to SMEs (up to 300% of PAYE/NICs liabilities), rather than the current cap that applies to large businesses (100% of PAYE/NICs).

  1. Additional support for different types of R&D or R&D intensive companies - Another very significant aspect is that HMT is open to views on whether RDEC should be additional targeted support for different types of R&D, or for more R&D intensive companies under the new regime, meaning that RDEC may cease to be sector agnostic in the future.  As HMT intends the cost of the UK R&D reliefs to largely remain within the current cost envelope, this proposal may over time result in winners and losers, with support being redirected to some degree to those types of R&D or sectors favoured by HMT, even though this is framed as "additional support".  This proposal has the potential for upside and downside risk for multinationals depending on whether the nature of its R&D finds favour or not in this debate. HMT invites views on the potential for more generous support.
  2. Other design features
    1. Qualifying indirect activities - HMT is considering whether the scope of activities which indirectly contribute to R&D, but which do not directly contribute to the resolution of scientific or technological uncertainty, can be clarified, potentially restricting or redesigning the current rules.  HMT asks for views on whether this issue affects UK R&D spend.
    2. Threshold - in the past, companies have been required to spend more than a minimum amount on R&D in order to make a claim. The purpose was to keep HMRC's costs down in terms of managing lots of small claims, and to encourage greater R&D spend. This started at GBP 25,000, was reduced to GBP 10,000, and then removed altogether. Since the removal, 50% of claims in 2019-20 were worth GBP 25,000 or under. HMT are considering introducing another threshold, and invites views as to the impact this would have.

More generally, HMT invites views on whether there is anything that current claimants of RDEC consider should be changed. The government would like to hear from a wide range of sources including multinationals, and especially invites comments from R&D intensive businesses and those representing them.

For further information, please speak to your usual Baker McKenzie contact.

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