Tax adviser warn the raid on R&D tax relief for companies is a huge blow to SMEs

Jeremy Hunt, released his Autumn budget, where he announced that he will be cracking down on R&D tax credits in an attempt to counter fraud and ‘poor value for money’.

The scheme has proven popular with increasing numbers of SMEs. In the financial year ending 2016, the SME R&D credits scheme cost £1.2bn in 2015-16, growing to £4.2bn in 2021, with pre-Autumn statement predictions estimating a rise to £8.9bn by 2027.

Leading tax adviser and founder Sarah Gardner argues that the Chancellors move will stymie SME growth and investment.

She says: “Fraud in the system is, clearly, contemptible and needs to be addressed. But it is already being addressed, so the idea that SMEs will face a less generous R&D tax credits scheme just as the economic winds mean that they need it most is a bitter pill.

“The broader benefits of R&D tax credits are harder to quantify – but in my professional experience, R&D tax credits enable SMEs to retain talent, to invest in further research, to draw in investment from overseas, and to afford to grow a business even in challenging economic circumstances.”

“The Federation of Small Businesses has also publicly disagreed with Hunt’s approach, stating that ‘the attempt to pull the rug out from small business innovation seemed to us a misreading of scant data points’.

“The reduction from 130% relief to 86% relief and the drop in the repayable credit rate from 14.5% to 10% will materially impact SMEs.

“The Chancellor’s budget also took another swing at SMEs by cutting tax-free allowance on dividend income from £2k to £1k and then £500 in subsequent years.”

Sarah adds: “The challenge is that the economy needs a thriving SME sector and hitting those who take the highest risk, but also employ a large number of employees – the same number as large businesses in the UK – will damage not just their personal income, but their ability to invest and employ and grow. It’s going to be interesting to see how the think tanks see the knock-on effects for the broader economy of this move.

“The irony is that the Chancellor – a former entrepreneur himself – has raided R&D tax relief, undermining his declared central themes of stability and growth.”