UK businesses fear Hunt’s reductions in R&D tax credits will derail innovation
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Figures from the Office of National Statistics reveal UK businesses are spending more on research and development (R&D) than the government expected. Companies racked up an impressive £46 billion in spending in 2021, an increase of more than £2.9 billion from a year earlier.
The increase in spending marks a sea change in British investment patterns. Historically, the UK lagged behind European technological leaders, such as France and Germany, owing to manufacturing’s share in their economies. But these new figures suggest the UK is on its own high-tech path, centred on pharmaceuticals, fintech, chemicals and energy.
R&D spending in the UK is increasing for several reasons. However, government policy is playing a strong role. R&D Tax Credits help businesses reduce their taxable profits significantly, incentivising them to invest as much as possible. Combined with low overall corporation taxes, British companies may be on the cusp of a productivity boom.
However, there is controversy after a recent ONS announcement. Chancellor Jeremy Hunt announced that the government would slash R&D tax credits in an attempt to balance the books. Officials believe companies are fudging their numbers, claiming more tax credits than represented by real tax spending.
Business advocates, though, are crying foul. Hunt’s attack on small businesses, they say, is a desperate attempt by the government to claw back lost revenue from the pandemic. Big businesses will keep their generous grants, making it harder for entrepreneurs to get ahead than ever before. Blaming SMEs, they say, is just a way of diverting attention away from the government’s true intentions.
Swingeing cuts to tax credits will also bring additional pain for small businesses. Research indicates many underestimate their R&D spending significantly, meaning they are paying more tax than they ought to. British companies need support in a time of crisis, they say, not having the rug pulled out from underneath them.
The ONS, though, says the situation isn’t set in stone. The independent fiscal body is working on a new methodology it will roll out next year, designed to simplify the process and improve transparency. Businesses should still be able to access tax credits, as long as they engage in legitimate R&D work.
It is also worth pointing out that the new proposal isn’t all bad for businesses. The SME additional deduction rate will fall from 130% to 86%, and the rate of the SME payable credit rate for surrenderable losses will go down from 14% to 10%, but it isn’t bad news. The RDEC standalone credit that is brought into the profit calculation will go from 13% to 20%, rewarding firms that make genuine investments.
Hunt’s new plan won’t hurt businesses a great deal, either, particularly those who make full use of their allowance each year. The policy is still competitive internationally and many businesses will want to relocate to the UK because of it.
The measure comes on the back of several other reforms announced over the past few years. The government is trying to develop a solution that suits everyone, including regular working taxpayers.