SME Concerns Around Proposed Merge Of R&D Regimes
While the Treasury still plans to implement a single research and development (R&D) tax relief regime – applicable to all claimants regardless of company size – SMEs have voices greater concerns than large companies.
The current position is that there are separate R&D regimes for SME business - which includes enhanced deductions for loss-making SMEs; and for large companies - via the R&D expenditure credit (RDEC).
The current RDEC rate (as of 1 April 2023) is 20%; the deduction rate for SMEs is 86% and the credit rate is 10%. The UK is unusual in having two different R&D tax relief schemes, but this could well change.
What’s proposed?
The proposal, set out in the consultation published back in January, is to replace the two separate R&D tax reliefs for SMEs and large companies with a single regime modelled on the RDEC
Among the reasons for change are to continue the theme of tax and administrative simplification and to target increasing levels of error and fraud. In the year 2020 to 2021, some £794m was lost to error and fraud, according to government figures). The Treasury says its specialist R&D team which focuses on SME compliance has more than doubled in size in recent years in response to growing levels of error and fraud.
What’s the reaction been?
The summary of responses to the consultation has now been published, revealing that large companies appear generally to support the planned single R&D regime (just 149 responses were actually received. That’s hardly surprising given the proposed change will not have any significant impact on the way large companies conduct their R&D.
SMEs are not viewing the proposals quite so favourably, in part because of the prospect of a whole new regime to get accustomed to. There were concerns among respondents that getting to grips with a new scheme as proposed would disproportionately affect them. That said, the Treasury has said SMEs would, under the new regime, get clear information in advance on the relief they could claim.
Support under the existing regime is valuable to SMEs. The SME respondents voiced concerns that many of them spend their early years loss-making, so the greater support gained through the SME scheme is important.
What’s next?
It appears that the target date for merging the two regimes is still set for April 2024, but a final decision has yet to be announced as to whether it will actually be implemented. We await further announcements.
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