Industry body slams UK chancellor's R&D tax credits plan for SMEs

14/10/2022. London, United Kingdom. Prime Liz Truss appoints Jeremy Hunt as Chancellor. Official portrait of the Chancellor of the Exchequer Jeremy Hunt.  Picture by Andrew Parsons / No 10 Downing Street

A proposal in UK chancellor Jeremy Hunt's autumn statement to overhaul the R&D tax credits system – for small and medium-sized enterprises (SMEs) to reduce what he described as "abuse and fraud" – has been criticised by industry organisations, including the BioIndustry Association (BIA).

Hunt said in his address to Parliament today that he plans to cut the deduction rate for the SME scheme to 86% and the credit rate to 10% – from 130% and 14.5% respectively – and increase the rate of the separate R&D expenditure credit (RDEC) from 13% to 20%.

The drop in the repayment rate to 10% "is likely to be detrimental to innovative start-ups" as these vehicles are "a vital source of financing" for these companies, according to tax expert Penny Simmons of Pinsent Masons.

"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," she said in a commentary on the move.

"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."

The comments came after an autumn budget that included a swathe of tax rises and spending cuts, and the formal acknowledgement that the UK economy is now in recession.

The chancellor's position is that the changes to tax reliefs will reduce fraud and error without materially changing the levels of R&D expenditure over the forecast period.

The BIA is adamant, however, that SMEs will be adversely affected by the changes to R&D tax credits.

"Just weeks after official government statistics showed SMEs are investing £16 billion more than previously thought in R&D to create the UK's innovation-based economy of the future, the Chancellor and Prime Minister are threatening to pull the carpet out from under their feet," said the organisation's chief executive, Steve Bates.

"This unsophisticated measure, which hasn't yet been consulted on, will not achieve the chancellor's stated aim to cut down on fraud," he added. "Stopping the 'no win no fee' tax consultants clogging up HMRC with bogus claims would have had an immediate impact."

The BIA said it will be providing an analysis of the implications of the proposals to HM Treasury officials and ministers and "looks forward to meetings on the detail in the coming days."

The Association of the British Pharmaceutical Industry (ABPI) meanwhile broadly welcomed the plans, particularly the decision to ringfence spending on R&D and the rise in the RDEC to 20%, which are "both essential to boosting the UK's share of global pharmaceutical R&D spending and investment," according to CEO Richard Torbett.

Simmons pointed out, however, that the RDEC doesn't provide a cash repayment, so is not as valuable to innovative start-ups, and tends to be used by larger businesses.

"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," she said.

"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."

17 November, 2022