SMEs lose out on R&D incentives announced in the Autumn Statement
As the dust begins to settle from an eventful Autumn Statement last week, tech businesses are beginning to digest the news surrounding the research and development (R&D) tax regime and what this means for them.
Ben Bilsland, partner and technology industry senior analyst at leading audit, tax and consulting firm RSM UK, comments: “For UK tech the change in R&D is good news for large businesses, with the RDEC (research and development expenditure credit) increasing from 13% to 20%. Taking into account the rise in corporation tax rate to 25% next year, this takes the net benefit from 10% to 15%, giving businesses a welcome boost for their R&D investment budgets.
“However, the good news didn’t extend to SMEs, with the enhanced deduction being cut from 130% to 86%. Again, taking account of the increased corporation tax rate, this reduces the benefit from 24.7% to 21.5% for profitable companies. For loss making businesses, the payable credit drops even further from 33% to 18.6%. In what is likely to be a move aimed at targeting abuse of the scheme, it is a big step backwards for the start-up and the SME sector, many of whom use RDECs to boost innovation and entrepreneurship.
“HMRC data suggests that 64% of the £6.6bn R&D claims paid out in FY20/21 were under the SME scheme. Eighty-eight per cent of the number of claims are under the SME scheme. This will come as a concern for many small UK tech companies as the cashflow from R&D tax claims for innovation is a key part of their forecasts.
“There are many small UK tech companies claiming under the SME scheme – for example the number of SME claims in the IT and communications sector under the scheme accounts for 76% of the total claims. Businesses in this industry are likely to be especially worried and may need to rework their models and projections.
“On balance, tech companies obtaining funding under the RDEC scheme will welcome these changes. 85% of the number of claims in professional, scientific and technical industry are made under SME scheme, below the average of 88%. RDEC claimants are generally, but not always, larger and more complex companies, therefore smaller UK companies may feel these changes in the R&D scheme are unfair in a statement that was presented as helping those who need support the most.
“While the changes to the R&D scheme will be disappointing news for some, there are pockets of optimism for the tech sector in narrative coming out of the government. In his statement to parliament, the chancellor wants to turn “Britain into the world’s next Silicon Valley”. To achieve this the government will need to make sustained efforts of investment in education and encourage the cultivation of new ideas in technology. It’s crucial that the UK can retain top tech talent and provides incentives for investment in tech businesses.”