Autumn Statement 2022: R&D relief for SMEs slashed

Chancellor Jeremy Hunt has announced a series of changes to the UK research and development (R&D) tax credit regime, including a cut to the deduction and credit rates for the SME scheme.

The deduction rate for the SME scheme will be reduced to 86%, while the credit rate will be cut to 10%, Hunt told lawmakers during his Autumn Budget statement on Thursday.

Hunt also announced that the rate of separate R&D expenditure credit will be increased from 13% to 20%.

A ‘significant rebalancing’ of R&D tax credits

The changes represent a “significant rebalancing” of the regime, resulting in 30% less tax benefit being available to businesses, according to Tim Croft, national head of R&D at Azets.

“On top of the increase of corporation tax [from 19% to 25% in April 2023], SMEs undertaking innovative work will be hugely disappointed in this announcement.”

“This will do nothing to stimulate growth in the SME sector of the economy,” Croft added.

This was echoed by Mark Tighe, CEO of innovation funding specialist Catax, who branded the changes “just as harmful as cuts to public services in the long run”.

“The revenues generated by businesses claiming R&D tax credits are the same pounds that end up running our hospitals and our schools,” he said.

Tighe went on argue that the change to R&D tax relief for SMEs “lets smaller UK businesses down at a time where they need it most”.

But according to Hunt, the Office for Budget Responsibility (OBR) has given assurance that the new measures will have “no detrimental effect” on the level of R&D investment in the economy.

He added that the government will “work with industry” ahead of the next budget to understand what further support R&D-intensive SMEs may require.

Eliminating bogus claims

The basis for the changes is to improve compliance in R&D tax relief claims, with the reforms coming amid “concerning reports of abuse and fraud,” according to Hunt.

This is the latest in a series of such measures proposed by the UK government. Firstly, in then-Chancellor Rishi Sunak’s Spring Statement (March), a tightening of the R&D claims process was announced.

Sunak outlined that as of April 2023:

• Claims will need to be endorsed by a named senior officer of the claimant company
• Companies planning to make a claim will have to notify HMRC of their R&D activity on the day it takes place
• Companies will have to provide details of any agent advising them on the claim

The R&D regime was showing clear signs of weakness at the time, as HMRC estimated big businesses to have overclaimed £725m in R&D relief in the 2020-21 tax year – representing a 16% jump on the year prior.

Three months later in July, HMRC unveiled draft legislation confirming Sunak’s plans. In addition, it proposed an expansion of qualifying expenditure on software and consumables to include data licenses and cloud services, as well as extending the scope of relief to cover mathematical advances.

This was hailed at the time as a positive step towards a “modernised definition” of R&D.

But for Azets’ Croft, the changes to the R&D regime outlined in the Autumn Budget will do little to stifle abuse of the system.

“We applaud the proactive steps being taken by government to simplify R&D tax reliefs across all countries and prevent abuse and fraud in the tax credit scheme,” he said.

“However, while making the scheme more difficult to claim under, these do nothing to address the real reason for the abuse, which is the unregulated mis-selling of the scheme by a handful of advisors in the market.”

Croft advises business owners to seek specialist advice from reputable advisers to ensure “bona fide claimants” don’t miss out on relief due to being “put off”.

Market participants posed similar arguments earlier this week, claiming that HMRC’s “aggressive” crackdown on R&D fraud is to blame for the first ever downturn in the total value of relief claimed by UK businesses.

According to HMRC data, the value of claims fell 4% between 2019/20 and 2020/21 – a dip worth £275m.

It also found that the UK spent just 1.7% of GDP on R&D in 2019 – a figure dwarfed by the EU average of 2.1%, and the US at 4.6%.