Southampton: RSM warns R&D tax reforms will stifle innovation

New proposals designed to prevent abuse of the R&D tax relief regime risk disincentivising small businesses from undertaking genuine R&D activity, RSM has warned.

The Government's consultation on reforming the SME R&D tax relief regime, which closed on 24 May, proposes a cap on the amount of payable R&D tax credit that a qualifying loss-making business can receive.

The reforms seek to address concerns that some businesses have abused the system by claiming payable R&D tax credits through artificial structures. 

The proposed cap is three times the company’s total PAYE liability for the year of the claim and is due to be implemented from April 2020.

While supportive of efforts to clamp down on fraudulent claims, RSM has warned in its response to the consultation that the proposals could disproportionately impact start-up companies, particularly in cases where directors choose to take no remuneration in the early stages to help the company to become established. Life sciences and pharmaceuticals, software and technology businesses are likely to be hardest hit, without careful safeguards being introduced to the proposed new rules.

RSM's warning follows concerns raised by the BioIndustry Association that the changes could disproportionately affect early stage businesses in the life sciences sector, whose work is often outsourced to universities or third-party specialists.

James Tetley, partner, and national head of R&D at RSM, commented: "The R&D regime is crucial for the UK's long term economic growth and plays a fundamental role in the Government’s commitment to supporting strong and sustainable private sector-led growth. With Brexit looming, it's even more important that the UK has a tax regime that is internationally competitive and that supports rather than stifles innovation.

"While we fully support the aim of clamping down on businesses that are fraudulently claiming R&D tax credits to which they are not entitled, these measures are targeting around 5 per cent of all SME claims. This is a sizeable number and many genuinely innovative businesses engaged in cutting-edge research and development risk being caught.

"These proposals need very careful consideration before the Finance Bill 2019-20 is enacted to ensure that the threat to genuine research businesses is minimised or preferably removed. We are encouraged that the Government has sought to consult widely and hope that the feedback provided by us and others is carefully considered."

The latest Government figures show that in 2016-17, R&D tax credits provided almost £3.5 billion of relief supporting around £24.9b of innovative investment. Claims from SMEs represented 85% of the total number of R&D claims submitted to HMRC in 2016-17.