Member Article

Tax expert: Changes to R&D tax relief from April to negatively impact small and medium sized businesses the most

Innovative small and medium sized businesses are set to be negatively impacted the most by changes from April 1 to research and development tax relief according to a leading tax expert.

Anne Rose, research and development tax consultant at accountancy firm Burgis & Bullock, says HMRC’s continuing overhaul of the tax relief system is set to see some businesses see a significant drop in funding for their work. From April 2023, rates will be changing for both the SME and RDEC schemes for R&D tax relief – and the changes could cut the cash benefit from the SME scheme by more than 50 per cent.

It comes as further changes are set to take place from next month including companies having to make claim notifications and provide additional information to HMRC around qualifying activities for the tax relief.

A new scheme was announced in the Spring Budget which is targeted at R&D intensive SMEs - focusing support towards those that have been most impacted by the rate changes already announced.

However this is set to be focused on specific sectors and will support the development of life-saving medicines, AI, machine learning and other digital-based technologies. Anne Rose, who has more than 25 years’ experience providing tax advisory services, supports a wide range of businesses with research and development tax credits.

She says that the measures being introduced in April could have a significant impact on businesses seeking to drive innovation and that the ongoing tightening of measures by HMRC could discourage businesses from making claims.

Anne said: “The changes being introduced to the rates of the SME scheme for research and development tax relief will likely result in small and medium sizes businesses losing out with a significant drop in funding available.

“Larger businesses claiming under the RDEC scheme are actually set to see an increase in the rates, however the impact of the changes to both rates varies depending on whether you are a profit or loss-making business.

“Loss making businesses have had the impact softened by the introduction of the new scheme in the Spring Budget. “Advisors across the country were expecting a reduction in the SME scheme, but not this much, and now any qualifying expenditure leading to a cash back claim particularly will be much less generous for some small and medium sized businesses.

“The changes could cut the cash benefit from the scheme by more than 50 per cent and that is a very big cut for SMEs that are seeking to invest in research and development – and might not fit under the scheme launched in the Budget. “SMEs could also be impacted by the changes to items such as claim notifications, which they might not be aware of, so it is important for tax advisors to ensure their clients are aware.

“This is all part of the change in attitude from HMRC towards claims under the SME scheme, with the ultimate goal of this compliance activity being to reduce the number of fraudulent claims that are being made under the scheme.

“Last summer, HMRC set up a fraud team with the job of reviewing claims and warning that if claims were suspected of being fraudulent then they might ask for the money back from businesses. “We’re seeing clients having to provide more information than ever before and around 2,000 small companies received letters in January to ask them to review their claims and get in touch with HMRC to discuss possible irregularities.

“The question remains whether this sort of HMRC activity is impacting the right people and whether fraudulent people will continue to claim until they are caught. “We hope that the changes in the rates won’t result in some SMEs with legitimate claims not proceeding, but that could be the case.

“SMEs are a major part of R&D activity in the UK, and exciting start-ups and businesses that are breaking boundaries are the backbone of innovation in this country.”

This was posted in Bdaily's Members' News section by Matt Joyce .