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The Risks of the Proposed Changes to R&D Tax Relief for Small and Medium-Sized Enterprises

Written by Jon Cooper

As ever, the Budget speech contains a quick reference to changes to the tax regime and it takes a detailed review the full Budget 2018 report to understand the true implications.  This newsletter, the first of three, looks at the proposals for changes R&D tax relief for small and medium-sized enterprises.

The Treasury opines that HMRC has prevented fraudulent claims totalling £300m under the SME R&D Tax Credit scheme.  This scheme enables a qualifying loss-making company to receive a tax credit payment.  However, there is no reference to the timeframe that the £300m covers.

To counter this, the proposal is that, from the 1st April 2020, the amount of payable R&D tax credit will be restricted to three times the company’s total PAYE and NICs liability for that year.  The government will hold a consultation on this proposal.

Let us be clear, there is without doubt an element of fraudulent claims under the SME R&D Tax Credit scheme.  We have heard horror stories.  The current ‘no win, no fee’ culture of many service offerings combined with a lack of transparency has enabled a small number of disreputable providers to thrive.

However, for the start-up, contracting out innovation work when finances allow rather than employing staff often makes business sense.  The ability to recover 33.5% of qualifying spend as a payment from HMRC that often only amounts to a few thousand pounds but can provide vital oxygen to move the business to the next stage.

At a time when the aim is for Britain to lead the world in technological innovation, we strongly oppose this proposal and will be outlining our views in the consultation.

SME is such a broad term covering business with between 0 and 249 employees.  In 2017, there were 5.695 million businesses in the UK of which over 99% were SMEs and 5.5 million businesses were classed as micro-businesses with between 0 and 9 employees and only 24% were employers.

The real scandal is that, according to official statistics, in the 2016-17 tax year, there were just 33,880 claims made under the SME R&D scheme.  Are we really saying that less than 1% of SME businesses are undertaking any R&D?

From our client portfolio, roughly 25% have an element of qualifying R&D across a wide profile of business sectors.  Indeed, at CooperFaure we have made our own successful R&D tax relief claim.

Fraud is serious and we fully support a considered approach to effectively combat it.  However, the proposal of an arbitrary arithmetic formula to combat it smacks of laziness and the pervading law of unintended consequences will stifle innovation.

£300m is a significant amount.  However, in 2016-17, the tax credit element within the 33,880 claims totalled £1,820m and, on the most conservative estimates, this means that £10 billion of R&D tax relief entitlement has gone unclaimed.

At CooperFaure, we are on a mission to demystify, simplify and educate on the generous UK tax incentives to support business innovation.

If you have ever wondered whether there is an element of your business activity that would qualify for R&D tax relief, please contact us a tax@cooperfaure.co.uk arrange an initial consultation with one of our team of specialists.

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