With forecasts telling him he had a £14bn cushion to play with, Chancellor Philip Hammond announced he was putting some of it towards increasing the R&D tax relief rate from 11% to 12%.
The new rate will take effect on expenditure from 1 January 2018.
Explaining that boosting the country’s languishing productivity was “the central mission of the Treasury”, Hammond committed an extra £8bn to the national productivity investment fund over the next six years and announced the R&D tax credit increase.
But some of the gloss wore off afterwards as accountants pointed out that the increase only applied to the “above the line” R&D Expenditure Credit (REDC) regime, and not the SME R&D tax credit that is calculated by deducting an additional 130% of qualifying costs from profits chargeable to corporation tax.
“It would be even more positive if this increase could be extended to benefit smaller businesses and SMEs as well,” said Jenny Tragner, director at R&D tax credit consultancy ForrestBrown.
“RDEC is aimed at larger businesses, and the government had already increased the generosity of this incentive with a reduction in corporation tax from 20% to 19% this year. It has now gone even further and given big business an extra bonus by increasing the RDEC rate too.”
Tom Byng, head of the R&D Group at MHA MacIntyre Hudson also noted the discrepancy and explained that the current SME relief is capped by EU state aid rules. “This is the first time since RDEC’s introduction that the two have not been increased together,” he noted.
“Given that SME relief is currently capped by EU state aid rules and was at its maximum level compared to the RDEC, it leaves space for the SME scheme to grow in the future. While not a huge increase it takes away any uncertainty and highlights the government’s commitment to R&D tax relief.”
According to HMRC’s impact assessment, the increase will benefit around 4,000 claimants and ultimately cost the Exchequer £755m over the next six years. Since it merely changes the calculation that needs to be done rather than any qualifying criteria, it is relatively painless to implement and will not add to HMRC’s admin costs.
R&D tax credits have become a lucrative niche for practitioners over the past couple of years – and a source of much-needed cash for businesses. Nearly one in 10 of the entrants to this year’s Practice Excellence Awards cited their efforts to help clients claim the credit, with the total value of claims approaching £100m.
In one instance. a business facing administration was able to turn around its fortunes thanks to a timely claim.
About John Stokdyk
John Stokdyk is the global editor of AccountingWEB UK and AccountingWEB.com.