Date
23 May 2023Category
R&D Tax CreditsInnovation is the cornerstone for many businesses, helping them to stay competitive, agile, and resilient no matter what the world throws at them. Unsurprisingly, the global pandemic and uncertain economic conditions are leading to many SMEs pressing pause on investment.
In the UK’s recent Spring Budget, Chancellor Jeremy Hunt tried to stimulate investment in innovation by increasing the rate of relief for Research & Development (R&D) intensive SMEs from April 2023. This increase comes with the backdrop of a wider R&D tax relief system revamp.
The proposed scheme changes tied to the revamp, which are set to possibly be implemented from April 2024, have been called into question for being skewed towards large companies and the existing R&D expenditure credit (RDEC) scheme, rather than encouraging small or medium enterprises to innovate through a rewarding SME scheme. While a move to a single and simplified scheme would be desirable, there needs to be sufficient generosity to drive productivity growth.
Arguably, the issue currently isn’t with businesses investing, it’s with their motivation to put through a warranted R&D tax relief claim. We are seeing many SMEs unwilling to put themselves forward for making relevant claims that they do qualify for because they’re worried about getting into an HMRC enquiry or slowing down their capital requirements.
The parameters for qualifying expenditure are huge, so a lot of businesses fall into the scope of the relief. The basic premise is that the business’ work must be an advancement or seeking an advancement of a scientific or technological uncertainty.
While possibly not hugely clear within the main announcements, there was a new definition of R&D intensive businesses put forward. Essentially, a business’ costs on R&D activity need to be more than 40% of their total expenditure and they need to be loss making.
The enhancement has reduced from the 130% to 86% and the difference for these businesses claiming the tax credit is they don’t have the reduction down to 10% to contend with - they can make the claim at 14.5%. This incentive is great, just maybe not at the level that it should or could be.
On the back of Brexit, the SME R&D scheme is now funded solely by the Treasury as opposed to being supported by the EU. When this is combined with economic fallout from the likes of the pandemic, the Government is clamping down on credit claims for R&D projects to ensure only warranted relief is paid out.
The attitude from HMRC is that a claim doesn’t qualify unless there’s sufficient proof, even going as far as arguing against specialists who work fulltime in this area.
The landscape has changed significantly in recent times. The Revenue have upped their game when it comes to compliance checks, making the criteria stricter for applicants. While action to tackle system abuse is necessary and welcome, it shouldn’t impact businesses who are simply trying to claim the relief for eligible investment.
In order to maximise a claim and ensure optimum return, it’s hugely important to speak to an advisor who knows what they’re doing and understands the legislation guidelines.
Some of the traps people sometimes fall into is not understanding that innovation is not necessarily the advancement of their own knowledge. Whilst activity may be R&D from the business’ perspective, it may not fall into the bracket of qualifying R&D from the Government’s point of view. Often businesses think that doing something new means a claim is possible and put forward an application with little or no evidence, meaning it all unravels when HMRC start to review.
If you have any questions in relation to submitting an R&D claim, whether your business is eligible for R&D tax credits or anything discussed within this article, please get in touch with a member of our specialist team or your usual Azets advisor.
