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R&D Draft Legislation – Two schemes could become one

07 Aug 2023

A Research & Development (R&D) scheme that would merge the current RDEC and SME schemes was announced by the Chancellor in the 2022 Autumn Statement and draft legislation for the new scheme was published on 18 July. The Government has not yet decided whether to merge the schemes from April 2024, but it may decide to do so. An announcement could be made as part of the fiscal event this Autumn.

What is the current situation?

If a company incurs certain expenditure on a project that aims to make an advancement in science or technology, it may be able to claim additional tax relief for that expenditure via R&D schemes. There are currently two different R&D schemes: the SME Scheme and RDEC.

The SME scheme is for eligible small and medium-sized enterprises (SMEs), who, since 1 April 2023, are allowed corporation tax relief on an extra 86% of their qualifying R&D expenditure (before 1 April 2023, the additional deduction was 130%). Also, if the company has claimed relief and made a loss, the loss can be surrendered in return for a payable tax credit of up to 10% (14.5% before 1 April 2023) of the surrenderable loss. The maximum R&D credit is capped at £20,000 plus 300% of the company’s PAYE/NIC bill for the claim period.

Currently, loss-making R&D-intensive SME companies can claim a repayable credit of 14.5% of the surrenderable loss, as opposed to 10% for non-intensive SMEs. An R&D-intensive SME is one that incurs more than 40% of its expenditure on R&D.

RDEC is for large companies and SMEs otherwise ineligible for the SME scheme, such as those who have been subcontracted to do R&D work by a large company. It allows a company to claim an expenditure credit equal to a set percentage of qualifying R&D costs. The percentage in effect since 1 April 2023 is 20%; previously it was 13% from 1 April 2020 to 31 March 2023. The expenditure credit is subject to corporation tax.

What is being proposed?

If the plans get the go-ahead, from 1 April 2024 there will be one single R&D scheme for all companies. It will be delivered in a similar way to the current RDEC scheme, meaning a company will claim an expenditure credit.

The most notable way in which the new scheme will differ from RDEC is that R&D project payments to subcontractors can be included in the claim, which is possible under the current SME scheme but not under RDEC. Companies that carry out R&D work that has been subcontracted to them will not be able to claim R&D relief in respect of this work.

The new scheme would incorporate the PAYE/NIC-related cap that is currently part of the SME scheme.

In addition, the new scheme would include the previously announced restrictions on relief for overseas expenditure that will come into effect from 1 April 2024. This means that only R&D work outsourced in the UK will qualify for the expenditure credit. There are some exceptions to this rule where it is not possible to carry out the work in the UK.

The new scheme would work alongside the additional relief for loss-making R&D-intensive SMEs.

What are the implications of the new scheme?

It seems unusual for the Government to spend time and resources on publishing draft legislation for a scheme that they have not yet decided to implement. There are therefore concerns that the Government has made a decision and will rush through sub-standard legislation without listening to stakeholders’ concerns.

One such concern is that the new scheme would render grant-funded or subsidised R&D projects ineligible for the relief. The legislation also excludes R&D expenditure that is “met directly or indirectly by a person other than the company”. This clause would mean many current R&D claimants would become ineligible for the relief. This will be kept under close watch over the coming weeks and months.

The draft legislation and accompanying guidance can be found here:


Martyn Ingles will cover the proposed R&D scheme legislation in the September Monthly Tax Update webinar. For more information, please see: https://www.2020innovation.com/webinar/monthly-tax-update-september-2023