Government proposes an overhaul to R&D tax credits for SMEs

Government proposes an overhaul to R&D tax credits for SMEs

In a consultation document published on 13 January, the government said that there was “justification to the case for further support” of small and medium-sized businesses (SMEs).

Following plans to eliminate an existing incentive, the government has proposed introducing R&D tax breaks for SMEs.

In November’s autumn statement, Chancellor Jeremy Hunt reduced R&D incentives and rebalanced investment incentives in favour of larger companies, sparking a backlash from trade associations.

While the additional deduction for SMEs fell from 130% to 86%, the rate of the Research and Development Expenditure Credit (RDEC) for larger businesses increased from 13% to 20%.

Beginning in April, small business tax credits will be less generous due to worries that the UK is lagging behind other nations in terms of R&D investment.

Additionally, the decision was made out of concern that fraudsters and false claims would exploit the generous scheme.

Plans from a Treasury consultation now call for a combined, single R&D tax scheme based on RDEC to replace the two current R&D tax schemes. In a consultation document released on Friday, the government acknowledged that there was “justification for further support” of SMEs, particularly in the life sciences industry.

According to the Treasury, the change will streamline the R&D tax structure and bring the UK into line with other nations.

The level of support for SMEs is anticipated to stay below what it was before the Autumn Statement, though. In 2021, SMEs invested £24 billion in R&D, a 4% increase over the previous year. Typically, tech and biotech companies use the credits.

The UK government recently asserted that it wanted to make the country a global leader in science. However, the Federation of Small Businesses is dubious about the new adjustments, claiming that they “risk a huge amount of disruption for little gain,” while others applauded the choice but questioned how many businesses it would benefit.

Rebecca Heap, Senior Research & Development Manager at Beavis Morgan R&D comments: “We have anticipated the proposal of a single R&D scheme and the measures taken to more closely align the SME and RDEC schemes from 1st April is a step towards this.

“We appreciate measures to simplify the R&D regime, but with considerable upcoming changes, the additional reforms are heightening uncertainty for businesses and tax agents who need more stability.

“Beavis Morgan will engage in the consultation with HMRC to share our thoughts on how one R&D scheme could be implemented and help ensure businesses remain well supported through the scheme with the inclusion of subcontractors and level of benefit, especially for innovative SME’s.”

If you have any concerns or queries relating to this matter, for further information or to arrange for a no obligation preliminary meeting to discuss how your company could qualify for R&D Tax Relief, please contact us. Our independent experts have many years of experience and success in advising businesses across a wide range of sectors.