What is happening to the SME Scheme?
Is the SME Scheme in Jeopardy? RDP Associates explains:
The 2022 Autumn Statement announced a reduction in the effective R&D tax credit rate. Which is approximately from 25% to 16% for SMEs offsetting the R&D tax relief with taxable profits and from 33% to 18% for SMEs in a tax loss position claiming a payable R&D tax credit.
In my 35 years of practicing in the area of R&D tax credits. I have never seen an SME Scheme slashed by that magnitude by any country with an R&D tax credit programme.
We now have a situation where the SME Scheme provides a lower tax credit than the Large Company Scheme; again a first for countries with R&D tax credit programmes.
Why is the SME Scheme in Jeopardy?
The government stated that the R&D tax relief was reduced to curb fraudulent and non-compliant R&D tax relief claims. However, I believe this was the political reason. I believe the real reason was likely that the government felt the SME Scheme was not incenting the SMEs to conduct more R&D than it otherwise would. This would be a politically difficult message to convey to the SME community; that their R&D efforts were not worthy of full government support.
Further, the statistics to support this claim are cloudy and contradictory. I am not convinced, based on what I have seen, that large companies are incented to do more R&D than are SMEs. Large companies have access to capital in a much more varied capacity than the SME. An SME has more difficulty to obtain bank financing for receivables let alone R&D projects. Large companies have access to bank financing, stock markets, capital debt and investment markets to finance all operations. Consequently, funding SMEs by way of R&D tax credits is important for them to continue to develop innovative new products and processes.
Curb abuse and non-compliance
The effective way to curb abuse and non-compliance is not to reduce the R&D tax credit rates (this will not deter fraudsters; as long as the programme is in place, they will file R&D tax credit claims) but for HMRC to increase queries and review of claims.
While HMRC is now carrying out more queries, previously, and for many years. HMRC had a very light touch when it came to querying R&D tax credit claims. I believe this was the reason for the proliferation of non-compliant claims. Canada had a similar problem but opted to solve the issue by having the tax authorities increase review and scrutiny of R&D tax credit claims. Compliance was brought into line within 3 years without having to reduce the R&D tax credit rate.
There are a number of changes coming to the R&D tax relief programme in 2023, but what are they?
The new R&D tax credit rates will take effect for R&D expenditures incurred after 1 April 2023. In addition, there are a number of other changes that will take affect this year, which include:
- Foreign contract fees and foreign EPW costs will no longer be an eligible R&D expense (with two minor rare exceptions).
- New R&D forms are to be introduced and will be required to be prepared and filed with the corporate tax return. These forms will require substantial detail to be submitted regarding the R&D projects claimed.
- HMRC is ramping up queries, which are focused on the technical or science part of the R&D claim.
- New claimants or companies that have not filed an R&D tax credit claim in the last 3 years. Will have to register their R&D tax credit claim with HMRC first and must do so within 6 months of year end.
What can an SME do?
Many SMEs will have an initial reaction that it is not worth making an R&D tax credit claim. This is more of a decision packed with emotion than reality. My belief is that if the R&D tax refund or tax benefit exceeds £5,000, it is worth it. Even given the costs of preparing the R&D tax credit claim. Also, there are likely cases when it makes sense to file for R&D tax credit claims that are less than £5,000.
However, now more than ever, it will be important for the SME not to miss out on any eligible R&D projects, activities and costs. RDP’s experience has been that many, if not most, SMEs miss out on opportunities to claim in these 3 areas. This is why RDP developed our proprietary Innovation Connection Programme (ICP). Our methodology ensures that all eligible R&D projects, activities, and costs are claimed.
When we speak to a company/claimant for the first time. Most say they are not 100% confident that they have claimed all R&D projects, activities and costs. Using RDP’s ICP methodology, our clients are 100% confident that all R&D work has been claimed before an R&D tax credit claim is filed.
RDP’s methodology involves the following:
- Utilising our proprietary system (ICP) to identify and capture R&D work as it occurs so nothing is missed.
- 35 fulltime software specialists, engineers and life science professionals. Plus, a roster of over 200 worldwide leading R&D experts that are on call in all fields of science and technology. We have prepared over 10,000 R&D tax credit claims. Plus have leading R&D experts to defend R&D tax credit claims queried by HMRC.
- Guided by our proprietary checklist, we cover all aspects of the R&D work. To ensure all eligible R&D projects, activities and costs are claimed.
- Prior to filing an R&D tax credit claim, we meet with the key technical and financial staff to review the R&D claim and examine what was claimed. Added to this and more importantly, what was not claimed. Ensuring that the client is confident all R&D work has been captured, reviewed and included in the R&D tax credit claim.
There is also some special planning that can be done. While the SME R&D tax credit rate has been slashed, the Large Company rate has been increased from 13% to 20%. In certain circumstances, SMEs can make an R&D tax credit claim under the Large Company Scheme. Which therefore earn the higher tax credit. RDP can assist with this planning and identify opportunities. As to when R&D tax credit claims can be made by an SME under the Large Company Scheme.
What is the future of SMEs R&D tax credit claims?
The Autumn Statement stated that the government’s preference is to move to one Scheme, with perhaps special concessions to SMEs. This would be more in line with R&D tax credit programmes in Ireland, France, the Netherlands and Germany. All of these countries have R&D tax credit rates of 25% or more. So the UK, with rates between 16% and 20% is currently not competitive with these countries.
However, any changes to the SME scheme will not take place until consultations are held, and new legislation is passed.
In the meantime, it will be important to make the most of your R&D tax credit claim and not miss out on R&D tax credit refunds.
Do you have questions about the SME Scheme in Jeopardy or looking for a fee consultation?
Please do not hesitate to contact us on 0208 214 1341 or email [email protected]