Time to stop harrying honest small businesses over R&D credits, say tax experts
Commenting on today’s announcement of a ‘rebalancing’ of Research and Development (R&D) tax credit reliefs away from small and medium sized businesses (SMEs) to larger ones the Chartered Institute of Taxation (CIOT) has called on the Government to stop taking an over-zealous approach to what qualifies as R&D for the purposes of SME relief.
The Treasury has been concerned for some time to increase the impact of these credits on the amount of R&D actually carried out in the country, as well as tackling fraudulent and aggressive ‘boundary-pushing’ claims. It has also been understood that the more generous SME scheme is regarded as less good value for money than its large-firm equivalent.
John Cullinane, CIOT Public Policy Director, commented:
“We fully support the Treasury and HMRC in trying to get better value for money from these reliefs and in combatting fraud and boundary-pushing. Reducing the generosity of the SME scheme may well reduce the level of fraud, though it will impact on honest claims as well.
“However we are concerned that new interpretations of ‘subsidised’ and ‘subcontracted’ expenditure will divert HMRC and honest taxpayers’ and advisers’ resources from the struggle against fraud; and actually damage the effectiveness of these reliefs.
“HMRC have in recent times been changing their interpretation of the existing rules of the more generous SME scheme in ways that are capable of acting almost as ‘catch-all’ provisions to deny relief.2 They have challenged claims that would have been legitimate under traditional interpretations, but have avoided bringing their new interpretations to a court or tribunal which could set a precedent against them. This has increased uncertainty and impaired the effectiveness of the relief.
“Now that the government has signalled that it intends to align the support for SMEs with the less generous arrangements for larger firms, there seems no further purpose in harrying SME claimants in this way.”
Overall, there will be a reduction in the cost of support given to R&D as a result of this policy change, rising to over £1bn pa by 2025/26 and to over £1.3bn in 2027/28.
As well as fiscal consolidation and concerns about abuse, today’s policy announcement reflects changes to the Office of National Statistics estimates of the amount of R&D actually carried out, which has led to the government coming close to its target of 2.4% of GDP.3
Notes for editors
1. The Government’s ‘Green Book’ published today says:
‘5.52 Reforms to Research and Development (R&D) tax reliefs - For expenditure on or after 1 April 2023, the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%, the small and medium-sized enterprises (SME) additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%. These Autumn Statement 2022 55 rate changes will be legislated for in the Autumn Finance Bill 2022. This reform ensures that taxpayer support is as effective as possible, improves the competitiveness of the RDEC scheme, and is a step towards a simplified, single RDEC-like scheme for all. The government will consult on the design of a single scheme, and ahead of Budget work with industry to understand whether further support is necessary for R&D intensive SMEs, without significant change to the overall cost envelope for supporting R&D. As previously announced at Autumn Budget 2021, the R&D tax reliefs will be reformed by expanding qualifying expenditure to include data and cloud costs, refocusing support towards innovation in the UK, and targeting abuse and improving compliance. These changes will be legislated for in Spring Finance Bill 2023.’
2. SME relief is unavailable where expenditure on R&D is either ‘subsidised’ or ‘subcontracted’. The new interpretations treat as ‘subsidised’ anything which is done pursuant to an arms’ length profitable contract, and suggests that a business customer can ‘subcontract’ R&D work unknowingly. These interpretations move relief away from the companies who make the decision to undertake R&D, so reducing the effectiveness of the relief.