Out-Law News | 17 Nov 2022 | 3:50 pm | 2 min. read
The UK chancellor’s decision to cut the R&D tax credit for small and medium-sized enterprises (SMEs) from 14.5 to 10% from 1 April 2023 is “hugely disappointing and frustrating and is likely to be detrimental to innovative start-ups”, a tax expert has said.
Penny Simmons of Pinsent Masons said SME tax reliefs are “a vital source of financing to start-ups” since they provide a cash repayment. “It is this repayment that is being cut. Without access to the cash repayment, many start-ups may struggle to secure adequate funding to progress R&D and ultimately new UK based innovations. Reduced tax reliefs may prove to be an insurmountable stumbling block – particularly to start-ups in the life sciences sector and those focused on developing technology to support the UK’s net zero transition, which may have limited access to other sources of finances.”
Her comments came after Jeremy Hunt delivered his autumn statement (70 pages / 5.94MB PDF) to parliament, which included a raft of tax rises and spending cuts amid a squeeze on the UK’s public finances. He told MPs that the additional tax deduction for R&D costs for SMEs would also be cut – from 130% to 86% – but added that the rate of the Research and Development Expenditure Credit (RDEC) would rise from 13% to 20%.
“The increase to the RDEC is to be welcomed. However, the RDEC doesn’t provide a cash repayment and therefore is not as valuable to innovative start-ups – the RDEC tends to be used by larger businesses that are less reliant on a cash repayment as a source of financing for new R&D endeavours,” said Simmons.
The reforms are being introduced “to ensure that taxpayer support is as effective as possible” and to “improve the competitiveness of the RDEC scheme” according to the Autumn Statement. The government will consult on the design of a single R&D tax relief scheme.
Simmons said: “one of the drivers to reduce the SME tax relief was the prevalence of abuse within the R&D tax relief system. It had been hoped that the government would seek to combat abuse by improving compliance measures and increasing investment in HMRC, rather than by reducing the availability of relief. As part of the government’s ongoing review into the R&D tax relief system, changes have already been announced to combat abuse. It is disappointing that the government has proceeded to cut SME tax relief now rather than wait to see whether new anti-abuse measures being introduced from April 2023 are effective.”
The government’s announcement that it will work with industry to understand whether further support is necessary for R&D-intensive SMEs provides “a glimmer of hope for start-ups” she said. “However, given the extensive lobbying that industry bodies have already undertaken to try and persuade the government of the value of SME tax reliefs to innovative start-ups, it is remains questionable whether further targeted SME tax reliefs will materialise in the short-term.”
Significant changes to the UK’s R&D tax credits system are being introduced from April 2023 as part of a government led review into the R&D tax relief system, first announced at the UK Budget in March 2021. The definition of R&D is being expanded to include pure mathematics and tax relief will also be available for cloud computing and data costs. A new territoriality restriction will limit the availability of tax relief to UK-based R&D, although a proposed exemption for certain overseas R&D activity should ensure that relief continues to be available where overseas R&D activity is necessary to the development of UK-based innovations.