Out-Law News | 01 Oct 2021 | 3:37 pm | 2 min. read
An increase in claims for tax credits for research and development (R&D) by small and medium businesses (SMEs) provides further evidence that the government needs to safeguard access to R&D tax relief for SMEs as part of its review into the R&D tax credit system, a tax expert has said.
Penny Simmons of Pinsent Masons, the law firm behind Out-Law, was commenting after the HM Revenue & Customs (HMRC) published its latest estimate of R&D tax credit claims. According to HMRC, the estimated number of R&D tax credits claims increased by 16% during the year ending March 2020, primarily driven by a 16% increase in the number of SME R&D claims. The total amount of R&D tax relief claimed was £7.4 billion, an increase of 19% since 2019.
“The fact that the increase in R&D tax relief claims is being driven by SMEs highlights the value of the R&D tax relief system to SMEs and the importance of retaining enhanced tax reliefs for SMEs,” Simmons said.
“The publication of the statistics is timely, given the ongoing review into R&D tax reliefs and the fact that as part of review the government is specifically considering whether the separate relief systems for SMEs and larger companies should be merged. The hope is that these statistics reinforce the importance of the R&D relief system for SMEs and the need to safeguard the unique characteristics of the SME relief system that are often vital to start-ups looking to innovate and invest in R&D,” she said.
These statistics reinforce the need to safeguard the unique characteristics of the SME relief system that are often vital to start-ups looking to innovate and invest in R&D
The government is currently reviewing the R&D tax relief system to ensure that the UK “remains a competitive location for cutting edge research, that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted”. Details of the wide-ranging review are contained in a consultation paper that was published in March. Broadly, the scope of the review is to consider whether to expand the definition of R&D; continue to maintain two separate relief systems for larger and smaller businesses; introduce changes to how the system is administered; and introduce territoriality requirements to make the reliefs more targeted.
The latest figures show a 15% increase in R&D expenditure to £47.5bn, whilst indicating that the information and communication; manufacturing; and professional, scientific and technical sectors continued to make the greatest number of claims. Together, these sectors accounted for 64% of claims and 69% of the total amount claimed.
Simmons said: “The increase in R&D tax claims should also add further weight to the argument that tax reliefs are important to encourage and incentivise R&D investment”.
“Boosting innovation and increasing R&D investment is central to the UK government’s post Brexit and post Covid-19 recovery strategy. Given the government’s target to increase R&D investment to 2.4% of GDP by 2027, it is hoped that these statistics reinforce the link between tax relief and investment and provide further impetus to ensure that the outcome of the review is to increase the value and availability of the R&D tax relief system,” she said.
Editor's note 19/10/21: This article was amended to reflect the source of the figures as HMRC.
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