By AAT Comment MembersTax relief reform is coming28 Nov 2022 MPs will examine how far tax reliefs really benefit the broader economy, and businesses are worriedTax reliefs are incredibly important to the government because these are the tools policymakers can use to nudge businesses and individuals to behave differently. However, assessing how effective they are and amending them isn’t straightforward.This isn’t because they are hard to change in and of themselves. All nations that pursue these kinds of incentives end up with a network of different schemes that are interconnected. When you change one element, there can be numerous unintended consequences, with businesses reacting quickly when it impacts their bottom line.Hence the need for a proper Treasury Committee enquiry, which was established in July. The cross-party committee will see MPs examine how far tax reliefs really benefit the broader economy.Enquiry’s scopeThe enquiry covers personal tax reliefs too — so it’s enormously wide-ranging. They will have to consider schemes ranging from the Rent A Room tax break for homeowners to the Capital Allowances regime for businesses — and everything in between. There are far too many to cover in detail here but the fact it will concentrate on the impact on employment, investment and growth will likely skew its focus towards business tax reliefs.One that has been making headlines and coming under scrutiny — former Chancellor Rishi Sunak was keen to explore reform — is the R&D tax credit scheme, created in 2000. Changes in this area are already in motion.It’s a great example of how usage of reliefs changes imperceptibly over time. Quite often this means a tax incentive has been a victim of its own success. They start small, grow in popularity and that’s when ministers realise some of the ways they’re being used don’t fit with original intentions. In its first five years, businesses claimed £1.3bn but this hit £7.4bn a year by 2019/20.Unfortunately, with this growth came abuse, and that was what prompted the government to take a broader look at what needed to change.One of those changes already announced for April next year is a restriction on tax relief for overseas spending. A report from the Treasury identified the problem – UK businesses claimed relief on £47.5bn of R&D spending in 2019 but only carried out £25.9bn of it in the UK. This didn’t fit with why the scheme was conceived more than two decades ago. This directly led to a decision to prohibit claims on overseas R&D spending from next April, unless certain conditions are met that mean it cannot be done at home.ImpactThere will be other changes too, but not everyone is happy with how the scheme has been represented recently. When tax changes are on the cards, businesses in particular are on edge, waiting to discover if the baby is to be thrown out with the bathwater.Rudimentary assessments of impact are made. In an evaluation published in November last year, HMRC estimated that, while each pound of relief under the RDEC regime for large businesses generates £2.40– £2.70 of additional R&D spending, the SME scheme isn’t as effective. Here, the benefit falls to £0.60–£1.28 for each £1 of relief claimed. The SME scheme costs more than Research & Development Expenditure Credit (RDEC) and has grown faster but there’s also job creation and long-term GDP growth to consider.This is the sort of rigorous focus that you can expect in a post-Covid world where national debts are becoming increasingly expensive to service and departmental budgets are tight. The IR35 changes designed to combat disguised employment are one recent example of tightening in the personal tax arena.Individuals were also hit with freezes on the inheritance tax nil rate, residential nil rate, capital gains allowance, pensions lifetime allowance and income tax thresholds. These areas are much more politically charged and prime minister Rishi Sunak has indicated he’s keen to see more restraint. As for R&D tax relief, whether there will be any more changes as a result of the Treasury Committee’s findings remains unknown, for now.Example: review of R&D tax reliefR&D tax relief rewards innovating businesses with a reduction in their limited company’s corporation tax bill or a cash lump sum.The SME scheme allows claimants to deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, resulting in an overall 230% deduction. Companies claim a tax credit if they’re loss-making, worth up to 14.5% of the surrenderable loss. Larger businesses claim under the RDEC, which is at 13% of qualifying costs.April 2023’s R&D tax reforms include:Anti-abuse measures that mean all claims must be accompanied by a detailed reportAdvisers will have to put their name to the report, and all claims must be signed off by a senior executive at the claimant companyCompanies needing to inform HMRC in advance that they intend to make a claim (so companies unaware will miss out)Exclusion of overseas R&D spendingInclusion of pure mathematics, data and cloud computing costs. AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.