Consultation on R&D Tax Credits

HMRC are presently consulting on improving access to R&D tax credits for the SME Sector.

Although over 80% of all R&D claims made in 2012/13 were made by SMEs, that statistic arose because there are considerably more SME businesses than large businesses.  The vast majority of the benefit of R&D credits accrued to larger companies.

HMRC’s consultation concentrates on the process by which claims are made rather than the definition of R&D for the purposes of the credits.  HMRC’s consultation therefore covers the following aspects of the claim.

• Mechanisms to increase awareness of the credit and therefore better engage businesses in order to increase take up of it.
• The key features of the credit and the extent which they could be simplified to help smaller businesses.
• HMRC’s guidance as to qualification requirements.
• The administration process to make a claim.

The consultation is welcome.  I have come across cases of clients accepting that they are undertaking R&D, but not appreciating that the tax relief extends outside the traditional pharma industries.  This has resulted in a number of clients, in a broad range of sectors, claiming credits in situations that may not be immediately obvious as falling within the tax definition of R&D.

One of the proposals which HMRC announced in the most recent Autumn Statement is a formal process whereby advance assurance is available to small companies claiming R&D relief for the first time.  The aim is to provide certainty as to the availability of the claim and therefore enable businesses to plan their finances more effectively.  This takes away the uncertainty experienced by the smaller business about their eligibility for the credits and should allow the business to manage its cash flows more effectively and, hopefully, provide an incentive to undertake even greater levels of R&D.

Advance clearances in the SME sector are not unusual.  For example the Enterprise Investment Scheme manages an excellent advance clearance service which is felt to generate greater levels of third party investment in smaller businesses.  I hope that the outcome of the consultation is an advance assurance run along the same lines as that of EIS.