Potential R&D tax reliefs put SMEs at risk

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The Treasury is edging towards merging R&D schemes – what does that mean for SMEs and accounting?

Last week saw the latest episode in the ongoing debate around the UK’s regime of R&D tax reliefs. One of the knottiest issues to resolve is whether to continue with separate schemes for large businesses and SMEs. There are arguments on both sides but there are legitimate concerns that merging the schemes will make it harder for smaller businesses to access the reliefs they’re entitled to. 

So what happened? The House of Lords sub-committee on the Finance Bill issued its report into the state of play of the UK’s R&D support system. It looked at a range of issues: the definition of what is – and isn’t – R&D, how the regime is designed and administered, how well understood the scheme is and the level of abuse and fraud.  

The Committee’s report will form part of the ongoing Treasury consultation into the future of the R&D relief scheme in the UK. It drew on the input of a range of stakeholders with AAT taking a leading role in giving a front-line view of how the profession engages with R&D reliefs.  

In my evidence to the committee I explained how AAT’s input was based around protecting consumers and encouraging HMRC to provide a greater level of detail and clarity to the purpose, process and guidance of R&D tax relief.

The debate

Under the current regime, SMEs can claim an additional tax deduction of 130% of qualifying R&D expenditure on top of the normal 100% deduction. Meanwhile, larger firms are covered by the Research and Development Expenditure Credit (RDEC) which provides relief by way of a credit, rather than as an additional tax deduction. 

The clarity of a single scheme is appealing to some, especially as it relates to cutting misuse. The current system is vulnerable to abuse; as the committee chair Lord Hurley pointed out, “Fraud and error are costing the taxpayer over £450 million each year.”  

That represents 4.5% of the total cost of R&D relief, an increase on HMRC’s estimate of 3.6% in each of the preceding two years. Crucially, the Revenue reported that the majority of fraud and error emanated from the SME scheme. 

On the other side, there are those that believe the complexity of what R&D is and how it relates to different businesses demands a more nuanced approach. Some fear merging all R&D relief will make it more difficult for smaller businesses to access the reliefs to which they are entitled.  

They argue such a change could risk the UK falling further behind in the global race to build an innovative economy for the coming decades. Certainly when we look how other countries – in Europe, Asia and the US especially – support their companies to invest in R&D, the urgency becomes clear.

Making our voices heard

Reading between the lines, it appears that the Treasury is erring towards merging the schemes under one umbrella. Given that, it’s imperative that the accounting profession gets involved in the discussion.  

What do accountants need from a reformed R&D relief system? What works in the current framework, and what needs to change? How are businesses using it, and what do they need in order to get the best out of the system?  

As with any significant regulatory change, it’s not just about the destination, but also the journey: getting the transition right is crucial to success. As we told the committee at the time, designing a transition that allows enough time for businesses – and accountants – to prepare for the change will be vital.  

This remains a significant issue for all businesses – our job now is to shape the direction of travel to ensure whatever emerges from the process is right for accountants, their clients and the UK’s economic future. 

That’s why we are calling on out members to speak up. The committee report draws heavily on our input, proof that there is willingness among regulators to listen to constructive feedback and input. As the Treasury consultation gathers pace, we are determined to ensure that the voice of the profession continues to be heard.

If you would like to share your views and feed in to AAT’s response to the consultation, please contact [email protected].

Adam Harper is AAT's Director of Professional Standards & Policy..

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