The UK’s new enhanced Research & Development (R&D) tax credit reliefs have received mixed reception from accountants, with some arguing that the measures will add bureaucracy to an already complex system.
The fresh reliefs, announced by Chancellor Jeremy Hunt during his Spring Budget statement on Thursday, mean that small and medium businesses will qualify for 27p of relief for every pound spent, providing that R&D makes up at least 40% of the firm’s total expenditure.
The measures will, in part, restore the benefit lost due to the recent reduction in the SME scheme, which saw the available reliefs fall to 18.6p in the pound.
But according to Jenny Tragner, director and head of policy at R&D consultancy ForrestBrown, the new reliefs only serve to add further complexity amid a raft of updates to the regime, including changes to relief rates and the inclusion of new expenditure categories.
“While enhanced support for SMEs is welcome, the qualifying criteria introduces further complexity for businesses already struggling to make sense of the raft of reforms announced at previous fiscal events and set to come into force this April,” she said.
Tragner also noted that the enhanced reliefs will only apply to loss-making SMEs, arguing that this significantly diminishes the value of the measures.
“Applying the more generous rate only to loss makers risks penalising businesses once they become successful.”
SMEs still out of pocket on R&D tax
In addition to announcing the enhanced reliefs, the Chancellor also offered updates on measures announced in last year’s Autumn Statement. Most notably, the implementation of restrictions on overseas expenditure will be delayed from April 2023 until April 2024.
Hunt also confirmed that new digital documentation requirements will apply to all claims submitted from August 1, 2023.
But Senga Prior, vice president of the Association for Taxation Technicians, echoes the views of Tragner and argues that the new measure “is not quite the giveaway it first appears”.
“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,” she said.
Prior also raised concerns around the prospect of a new, combined R&D scheme (replacing the separate SME and RDEC schemes) which was proposed via a consultation published on January 13.
The “simplified” version of the scheme could be implemented as early as April 2024, the consultation said.
“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,” said Prior.
“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.”
‘Finally some good news’
But ForrestBrown’s Tragner went on to balance her criticism with enthusiasm for the fresh delay to restrictions on overseas expenditure. This could “mitigate” some of the challenges posed by the new R&D scheme, and demonstrates that the government has “listened to feedback”, she said.
This was echoed by Chrissie Freear, R&D tax partner at PwC, who said that while the new reforms will favour larger SMEs, “many will welcome the signal that the Chancellor has taken on feedback from the sector following the Autumn Statement”.
“The Chancellor has demonstrated commitment to supporting UK innovation and investment with further reforms to R&D tax credits,” she added.
Similarly, Andrew Lalsing, innovation and R&D tax partner at Menzies, argued that while the additional reliefs “did not mark a full return to generosity”, it will provide “some comfort” for SMEs looking to fund valuable projects.
“After the last two budgets failed to deliver on the government’s statement that they want to strengthen the UK’s position as a global science and technology power, there was finally some good news in the Spring Statement for R&D intensive SMEs,” he said.
Announcing the updates to the R&D scheme, Hunt outlined his primary goal of making taxes “more competitive in our life science and creative industry sectors”.
He added that the support package will be worth £1.8bn to around 20,000 “cutting edge” companies, who are “turning Britain into a science superpower.”