R&D relief changes still leave SMEs out of pocket
Enhancing tax relief for companies with significant levels of research and development (R&D) activity does not go far enough to help small and medium sized enterprises, the Association of Taxation Technicians (ATT) has warned.
At today’s Spring Budget, Chancellor Jeremy Hunt announced that R&D tax relief would be enhanced for R&D intensive small and medium sized enterprises (SMEs).1
Cuts in the R&D relief available to SMEs were originally announced at the Autumn Budget 2022 as part of a package of measures to tackle fraud and abuse in the R&D relief schemes. At the same time, an increase in the support offered to larger companies under the R&D Expenditure Credit (RDEC) scheme was announced.2
Senga Prior, chair of ATT’s Technical Steering Group, said:
“Whilst the announcement of enhanced relief may be welcomed by those SMEs who benefit from it, it is not quite the giveaway it first appears.
“For those SMEs that qualify as ‘research intensive’, the proposed increase will, in reality, only partially offset the effect of previously announced cuts in relief. Whilst it will restore the payable credit available to loss making companies to the level it was before those cuts were announced, it will not increase the additional tax deductions available to their previous level.
“Those SMEs who do not meet the high bar of spending 40% of their total expenses on R&D required to be classed as ‘research intensive’ will receive nothing from today’s announcement.
“We strongly support efforts to crack down on abuse of the R&D relief regime and improve compliance. However, we do not consider that restricting the level of relief available to SMEs is a proportionate way to achieve this.”
A recent HMRC and HM Treasury consultation3 proposes replacing the two current R&D relief schemes completely with a new, single scheme from 1 April 2024. The ATT’s response4 to this consultation expresses concerns that this new scheme would not provide adequate support for SMEs.
Senga Prior continued:
“Alongside a reduction in the tax relief available to them, SMEs also face being forced into a completely new R&D scheme in a little over a year.
“We are concerned that the proposed new scheme does not take into account the very real differences between the activities and needs of smaller and larger companies.
“Taken together, the rate reduction for SMEs and proposals for the new scheme risk sending the message that the UK values the innovative contributions of smaller companies less than that of their larger peers.”
Notes for editors
2. At the Autumn Budget it was announced that, with effect from 1 April 2023:
- The deduction rate for the SME scheme will be reduced from 130% to 86% and the credit rate from 14.5% to 10%
- The Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%
Today’s Budget announcement restores the SME credit rate to 14.5%, but does not increase the additional deduction.
3. R&D Tax Reliefs Review: Consultation on a single scheme.
4. ATT consultation response: R&D Tax Reliefs Review: Consultation on a single scheme.