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The future of R&D cash tax benefits for SMEs

Caroline Hunt, Director, Corporate Tax
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R&D cash tax benefits remain one of a number of key tax measures available to help innovative businesses prosper.

The good news is that the number of innovative businesses in the UK is increasing and more and more businesses are seeking to claim R&D cash tax benefits from HMRC. However, it has become apparent that amongst these there are a number of R&D claims being made fraudulently. In the last year HMRC identified £300 million of fraud linked to R&D claims and this has led the Chancellor to introduce measures to counter R&D fraud. 

From 1 April 2020, the amount of R&D cash tax credits that can be claimed in any one year will be limited to three times the company’s total PAYE/NIC bill for the year. While this measure is to be commended, it does appear to discriminate against businesses without sufficient in-house expertise that have to rely on external man-power to carry out their R&D activities. Equally, the proposals do not address the fact that it is cheaper to pay dividends rather than salaries to owners of entrepreneurial businesses undertaking R&D.

Given the fact that R&D is not defined in the tax legislation, and nor is there a prescribed way to make an R&D claim, surely it would be better if HMRC were to provide businesses with more prescriptive guidance to help them make valid R&D claims rather than target businesses that undertake R&D with the help of external resources or who pay dividends instead of salaries.

While we welcome any measures to counter fraudulent claims, the Budget proposals appear to fall short of their objective and we would urge HMRC to deal with the more fundamental uncertainty leading some businesses inadvertently making erroneous claims.

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