Last month the government published draft legislation to merge Research & Development Expenditure Credit (RDEC) and the small or medium enterprises (SME) R&D relief.
As HM Revenue & Customs explains it, the draft legislation establishes a single R&D relief, delivered in a similar way to the existing RDEC – as an expenditure credit. But it differs from the current RDEC in several ways, most notably that companies will be able to claim for payments made as part of an R&D project to subcontractors, as is currently possible in the SME scheme. It is set to take effect on or after 1st April 2024.
Mark Smith, a partner at innovation consultant Ayming, thinks this is a bad idea, especially for UK construction.
He explained: “UK R&D is about to suffer a major setback. On the surface, the government’s decision to merge the two R&D schemes represents a welcome simplification of the system. But hidden under the radar, there’s a concerning barrier, which will significantly dampen the innovation potential of the UK’s economy.
“The government plans to merge the two R&D schemes, expanding the cost rules of the SME scheme to apply to businesses of all sizes. The new rules will prevent claims for subcontracted R&D, meaning the companies that are doing the R&D won’t be eligible to receive the funding for it. Instead, the companies that commission the R&D will.
“Although it sounds sensible, it will raise massive problems for subcontractors. The construction industry presents a useful example. If a hotel chain commissions a construction firm to build an innovative, sustainable new building for which it has to develop cutting-edge technologies and materials – the construction firm actually doing the R&D won’t be able to access the funding. Instead, only the hotel, which hasn’t had anything to do with the innovation efforts can apply for credits. And they often won’t claim due to a lack of technical expertise in what R&D has been carried out. Surely a well design R&D incentive shouldn’t reward a hotel for innovation in civil engineering over a construction firm.
“R&D tax relief represents essential funding for major firms, especially those in construction who are needed to deliver the buildings and infrastructure the UK needs to thrive. The relative stability of the R&D schemes until now has been a huge driver for increased innovation in the construction sector. As it stands, the proposed changes will see the R&D incentive for the UK’s construction industry bulldozed.
“The purpose of the scheme is to incentivise greater levels of innovation – spurred by ambitious businesses that reap the benefits of the effort they put into R&D. Take that immediate benefit away and incentive is dangerously eroded. If they go ahead, the proposals will leave many businesses without funding, which can only be a bad thing for the UK economy.”
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