Following the announcement in the UK Budget on 3 March 2021 of a consultation on the research and development (R&D) tax relief the UK government has issued a consultation document.

The UK currently offers two main tax reliefs to companies for R&D undertaken in the UK. The R&D Expenditure Credit (RDEC) is equal to 13% of qualifying R&D costs. The R&D relief for small and medium enterprises (SMEs) offers an enhanced tax deduction amounting to 130% of the qualifying costs. For loss-making SMEs a tax credit of 14.5% can be obtained against the amount of loss surrendered. For some expenditure such as that on work subcontracted to it an SME can claim the RDEC on the specified categories of expenditure.

The types of activity qualifying for R&D relief include staffing costs of employees and agency workers; consumable materials such as water, fuel and other types of power; some software expenditure; payments to volunteers for clinical trials and some subcontracting costs.

The consultation is looking for comments on how the two main R&D reliefs support R&D in the UK, the ways in which they operate, their interaction with the way R&D is performed and the differences in design between the two reliefs.

Views are invited on whether the provisions of the two schemes should be amended so they remain competitive; and whether the definition of R&D and the scope of what qualifies for relief is still suitable for achieving the goals of the relief.

Commentators are also asked to give their comments on whether the existing rates of relief and the difference in rates between the RDEC and the SME R&D relief are still appropriate. The government has recently carried out an evaluation of the SME scheme which showed that it is valued by businesses and helps them to invest more in R&D, but the RDEC scheme is preferred by some businesses for its simplicity and because the relief is given above the line and adds to the income shown in their financial statements. Some commentators have suggested that R&D relief could be simplified, with one unified scheme similar to the RDEC offering a higher rate for SMEs, and comments are invited on this.

Given the specialist nature of the work of identifying R&D activity eligible for the tax relief, some taxpayers are engaging specialist agents to advise them and prepare claims. As some of these agents operate on a “no win no fee” business model there is some concern that there is pushing of boundaries with claims for expenditure on marginal or ineligible activities. The consultation is therefore looking for views on taxpayers’ experience of using agents and how the expertise and specialist knowledge of agents assisting with R&D claims could be improved.

The consultation also asks if any additional areas of qualifying expenditure should be included within the scope of the tax relief, and what would be the impact on R&D activities.