Proposed reforms to R&D tax relief pose opportunities and threats to UK business innovation

Proposed reforms to R&D tax relief pose opportunities and threats to UK business innovation

The proposal to unify the two current R&D tax relief schemes into one poses both opportunities and threats to UK business innovation, accountancy and business advisory firm BDO has warned.

In its response to HMRC’s consultation on R&D reform which closed today (13 March), BDO backs the idea of a unified R&D scheme to bring simplicity for businesses. The opportunity to combine the best of both current schemes could provide a significant boost for innovation in the UK.

The current SME and Research & Development Expenditure Credit (RDEC) schemes offer different rates of relief with the SME scheme being more generous - even after planned reductions in tax relief take effect from 1 April. Start-up and growing businesses will be concerned that they will get less tax relief under a combined scheme. BDO suggests that this fear could be addressed within a single scheme by offering one enhanced baseline rate of relief (possibly 20%), plus additional relief in cases where the R&D meets government policy or specific targets. This could include, for example, extra relief for R&D work carried out by SMEs in certain locations under the levelling up agenda or for projects in vital sectors such as Ai, Biotech, Fintech, and CO2 reduction in support of Net Zero objectives.

A key advantage of creating a single scheme is the opportunity to raise the profile of R&D within businesses. Basing the combined rules on RDEC would mean that all companies get an ‘above the line’ credit in its accounting, making the relief much more prominent for the business and its stakeholders – this has had a big impact on large businesses since it was introduced. 

Moving to a single scheme could also remove anomalies* between the two schemes. For example, there are currently differences over which party can claim where R&D is subcontracted. Setting a default position that it is the company that does the work that can claim would bring clarity. But the government should also build in commercial flexibility, for example, by allowing the principal to elect to claim relief on subcontracted work for the life of the contract. This would allow both parties to refer to the election in their contract clauses, and to make it crystal clear from contract who can claim the R&D relief.

While BDO backs the idea of a single scheme, changes that are already planned for this year will create much disruption for businesses so it is calling for the government to ensure that any unification of the schemes is not implemented until accounting periods after 1 April 2026 at the earliest.

Carrie Rutland, BDO Innovations Incentives partner said:

“The government has been grappling with how to reform the R&D tax relief regime for some considerable time, but we still don’t have a clear understanding of the policy direction.

“There may be immediate changes to the current schemes announced in the Spring Budget, but fundamentally, businesses need certainty and stability. It’s now critical that the government sets out its desired framework for R&D tax relief for the long term so that businesses can plan ahead. 

“A single R&D scheme could help to make the UK tax regime the most competitive for innovative businesses but it’s vital that the R&D tax relief is reformed in a way which prioritises growth and simplicity for businesses of all sizes.”



Contract Research Organisations (CROs).

Currently, where R&D processes are subcontracted by large companies (such as in life sciences, where testing work is often outsourced), the contractor cannot claim subcontracting costs as they are subject to RDEC, and third party subcontractor companies such as CROs cannot claim as it is not ‘their’ R&D. This has resulted in some CROs moving activities away from the UK so they can benefit from overseas R&D tax credit regimes.

Outsourcing costs

Currently, SMEs can only claim 65% of the cost of outsourcing R&D work using external workers whereas, large companies claiming RDEC can claim for 100% of such costs. This can be detrimental to start-up businesses which often have to outsource some parts of their R&D projects.

Note to editors

Accountancy and business advisory firm BDO LLP provides integrated advice and solutions to help businesses navigate a changing world. 

The organisations we work with are Britain’s economic engine –entrepreneurially-spirited, high-growth businesses that fuel the economy.  

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BDO LLP operates in 17 offices across the UK, employing 7500 people offering tax, audit and assurance, and a range of advisory services. BDO LLP is the UK member firm of the BDO international network.

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Frank Shepherd
Tel: 07812 463601