Small businesses looking to invest in research and development (R&D), could see funding for R&D tax credits cut back.
R&D tax relief allows SMEs to hire people, develop new processes and contribute to the UK economy.
But according to a report, despite the pandemic, Chancellor Rishi Sunak is frustrated by the lack of investment by SMEs and is looking to concentrate more on larger businesses. This is despite offering what he says is one of the most generous tax regimes for R&D investment in the world.
The amount of self-funded investment has actually dropped since the £7.7bn R&D tax credit was launched in 2000.
The Office for Budget Responsibility estimates that the cost of the reliefs will increase from £7.7bn in 2021-22 to £11.9bn in 2026-27.
Why is the Chancellor unhappy?
The Centre for Business Research report published last year said that self-funded business investment in R&D was between 10 and 15 per cent lower than before tax credits were introduced.
Mr Sunak told believes that the R&D tax credits are not doing enough to boost growth despite “huge and rapidly growing sums” being spent on them – as he told his audience while giving last months’ Mais lecture.
The lecture is regarded as a leading event for the banking and finance community of the City of London.
How could the funding be better used?
The Chancellor is said to be looking at whether tax credits would be better focused on larger companies, rather than SMEs.
HMRC is also considering whether it continues to maintain two separate relief systems – The Research & Development Expenditure Credits (RDEC) and the SME scheme or consolidate them into one.
HMRC has also found that SMEs generated between just £0.60 and £1.28 of additional R&D expenditure for each £1 of tax relief claimed, compared with up to £2.70 for larger companies.
This could be because SMEs have found the last few years challenging with the rising price of energy, materials and the pandemic preventing companies from investing in their businesses.
The next set of changes to R&D tax credits come into effect from April, tightening up the rules so that research and development expenditure can only be claimed for work being done in the UK, for example.
For help and advice on R&D tax credits contact a member of our expert team today.