Well, there were no unexpected announcements regarding R and D Tax Credits from the Chancellor, but he did raise a couple of questions.
What we know about the R&D scheme performance so far…
R and D is beneficial to business growth, particularly on the international stage, and the Chancellor confirmed this within his speech saying, “As I committed at the Autumn Statement, we’ve reviewed, with business, our R&D tax credit regime and concluded that it is globally competitive.”
It is also very important for the development of British companies as the reinvestment potential in future innovation has a huge long term impact.
R&D scheme into the future…
We know that only around 10% of eligible companies are applying for R and D tax credits, so it’s great that Hammond also announced, “But to make the UK even more attractive for R&D we have accepted industry calls for a reduction in administrative burdens around the scheme and will shortly bring forward measures to deliver them.”
This tells us that there probably won’t be any significant changes to the scheme itself in the near future, if they are investing in simplification and clearer guidance.
Within the Budget document, he also pledged, “To further support investment, the government will make administrative changes to the Research and Development Expenditure Credit [(RDEC)] to increase the certainty and simplicity around claims and will take action to improve awareness of R&D tax credits among SMEs.”
We hope that an awareness campaign will decrease the disparity of uptake between the number of innovative business and the proportion of those businesses that claim their R & D Tax Credit entitlement.
At DSM we are passionate about our part in this crucial education about R and D Tax credits and how financially beneficial the scheme is for SMEs and large businesses alike.
What we don’t know
Are there the same opportunities for SMEs as large companies?
On paper, the opportunities for claiming R and D are the same for large companies and SMEs. But there is still more uptake of the scheme by large companies who, arguably, need the additional funding less than SMEs.
Larger companies can afford more resources, like R and D tax professionals, to access and optimise their R and D claims. Perhaps this discrepancy could be addressed by the government’s intended ‘awareness’ plans by targeting SMEs.
What about Advance Assurance?
Advance Assurance has been tried a couple of times, with limited success, as a government attempt to engage SMEs with R & D tax credits. The idea is that a company’s first three years of R and D tax credit claims are dealt with automatically. There are no additional investigations into the company concerning R and D for that time period.
This is a useful scheme, but unless you have already heard of R and D Tax Credits and worked out that your business is eligible, you won’t be able to take advantage of its benefits. Again, the application procedure is not straightforward and requires a lot of time and energy, or an R and D tax credit expert.
Do we need two different schemes for SMEs and large companies?
As the RDEC scheme for larger businesses has had more successful uptake, with a higher profile and more reliable financial predictions, maybe its format could also be applied to SMEs.
Will the rate for R and D tax credits change in the Autumn Budget?
Having as much put aside in the ‘brexit fund’ was a main feature of the Spring Budget, so perhaps Autumn will be the time for an R and D tax credit increase. May’s Industrial Strategy also pointed towards the probability of a rise in order to fund the future innovation that is crucial to success.
The connection between a falling Corporation Tax rate and the rate of R and D tax credit should not be overlooked. SMEs that are making a loss have a choice between offsetting those losses against future profits (at 20%), or receiving an amount of credit in cash (at 14.5%). To keep this difference between the two, the government will need to raise the R and D tax credit rate in conjunction with their lowering of the corporation tax rate. We will just have to wait and see if the government agrees.