The HMRC has previously announced their plans to revamp their existing research and development initiatives by merging the two core schemes. Draft legislation published back in July is bringing the proposed merged Scheme ever closer, proposing an implementation date as early as April 1, 2024.

The relief currently operates through an SME scheme for small businesses and a separate scheme for larger businesses called RDEC – the Research and Development Expenditure Credit. The government recently consulted on the merger of the two, having already adjusted R&D tax relief rates in last year’s Autumn Statement to bring them closer together. This ‘rebalancing’ was seen as a stepping stone towards the now-proposed single scheme.

The two existing schemes have different rules catered to their target claimants. As such, they also have notable differences in their approaches to contracting out of R&D. As such, any changes made by merging the schemes is sure to impact a large number of companies.

Based on the guidance provided, the intention is to adopt the RDEC-style credit across a broader range of companies. This will still introduce changes to the existing RDEC rule base to accommodate the merger. For example, some companies will gain the ability to claim for relief for R&D carried out by their subcontractors, while R&D subcontractors who can currently claim under RDEC in certain circumstances will lose their eligibility – with potential implications for supply chain relationships.

The reduced complexity is likely to be a welcome advantage after the initial confusion. While the current twin-track system has its advantages, it can be challenging for businesses to navigate it successfully. The first step in claiming is to confirm which scheme a business is eligible for, but this process isn’t as simple as it may seem. Thanks to complexities about subsidised expenditure and contracted R&D, amongst others, firms that operate as SMEs may fall into the RDEC category when considering R&D tax relief. The merger may remove at least some of these complexities.

At this point, we must hope the HMRC considers the various implications of either scheme and how combining them may impact the majority of taxpayers. A usable and reasonable scheme is essential to encouraging domestic innovation and keeping investments in technology and science at the forefront.

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If you would like to find out more about how your business could benefit from R&D Tax Credit, contact a Swanson Reed R&D Tax Advisor today.

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