Over half of SMEs opposed to R&D reform, study finds

More than 51% of SMEs disagree with UK government plans to merge the two existing Research & Development (R&D) tax credit schemes, according to the results of two surveys conducted by Azets.

A consultation on the proposals by HM Treasury, which would see the current RDEC and SME schemes merged, concluded last month. A new scheme could be implemented as early as April 2024.

The Azets surveys, which gauged the viewpoints of 42,000 SME businesses, found that the majority of respondents were broadly in favour of a single scheme. However, more than half (51.3%) considered the Treasury’s proposals to be negative, while 35.9% were undecided. Just 12.8% of respondents thought the proposals to be positive.

“Most respondents agreed that a single scheme was desirable but, as proposed, would be to the detriment of the SME community,” says Tim Croft, Azets’ national head of R&D tax. “Almost everybody who replied said this was actually going sideways around the issues and minimising even further what the small companies scheme looks like.”

The surveys indicated that simplification of process and clarification of qualifying expenditure were the main attractions of a single scheme, while reduction in value for SMEs and a lack of additional measures to prevent fraudulent claims were commonly cited downsides.

Croft adds that a single scheme would need full clarity on which qualifying activity is permissible, in addition to clear guidance on claimant criteria and sufficient financial reward to incentivise claims. The lingering doubt as to whether the current proposals will achieve this is “hugely frustrating”, he says.

“It is great news for simplification, speed and processing, but we need some better guidance on what is allowable because at the moment it is massively subjective and very much dependant on how each tax inspector determines what is in front of them.

“The scheme needs to be set out in a better way than the government is proposing.”

Proposed scheme ‘skewed’

In response to the fresh proposals, Croft has submitted a letter to the government detailing the results of the surveys in addition to submitting his own technical queries and voicing various concerns regarding the revamped scheme.

He argues that in its current form, the new scheme is unlikely to encourage the SME market to innovate, supporting this by noting that 74% of Innovate UK – the nation’s innovation agency – funding is awarded to SMEs because they are deemed to be undertaking “crucial R&D activities”.

He also argues that the proposed scheme is “skewed” towards RDEC (the incentive scheme for larger organisations), and that SMEs are being “unfairly penalised” due to the actions of a minority abusing the system through spurious claims.

Finally, Croft warns that a less attractive scheme could lead to an exodus of UK talent to continental Europe, where businesses “might enjoy better trading conditions”.

Croft’s concerns are broadly echoed by Jenny Tragner, director and head of policy at specialist R&D consultancy ForrestBrown. The government must dispel doubts regarding reduced generosity for SMEs by offering more clarity, she says.

“To give businesses confidence in the legitimacy of their claims, the government should establish a clear roadmap for design and implementation of the single scheme, including consideration of the rates of relief.”

Tragner also echoes Croft’s more positive sentiments, arguing that a single scheme is theoretically desirable for SMEs if executed properly.

“If the single scheme is modelled on the more recently designed RDEC structure, it should provide more certainty, visibility, and boost access to the R&D tax relief scheme for innovative businesses across the board,” she says.

More change for the SME scheme

The proposals for a single R&D regime are the latest in a series of measures impacting the SME scheme. Most notably, as part of his inaugural Budget statement as Chancellor in November 2022, Jeremy Hunt announced the lowering of the SME scheme’s deduction rate from 130% to 86%, and the credit rate from 14.5% to 10%. In contrast, the RDEC scheme was handed a 7% boost (from 13% to 20%).

In his Spring Budget four months later, Hunt announced that he would allow SMEs partly recoup some of the fresh losses with a new “enhanced” reliefs programme. Under the programme, SMEs will qualify for 27p of relief for every pound spend, providing that R&D makes up at least 40% of the firm’s total expenditure.

The measure was met with a volley of backlash from across the industry. Some argued that it would add bureaucracy to an already complex system, while others suggested that the lofty 40% threshold would incentivise fabricated claims.