R&D tax relief capped for small businesses

Small businesses’ access to valuable tax relief when investing in research and development (R&D) could be curtailed by attempts to crack down on fraud in the system.

Small businesses' access to valuable tax relief when investing in research and development (R&D) could be curtailed by attempts to crack down on fraud in the system. R&D tax credits, paid to companies investing in innovation, are currently worth around £3.5bn a year. The scheme is particularly generous to small and medium-sized enterprises (SMEs), which receive around 85% of this cash, providing valuable assistance to lossmaking firms that might otherwise struggle to invest.

This relief unlocks around £25bn of investment in innovation each year, estimate ministers. However, they are concerned that abuses of the system are increasing, via companies setting up artificial arrangements to inflate the value of the relief for which they are eligible. From April next year, the government plans to limit the value of the credits to three times the value of a company's pay-as-you-earn (PAYE) liability in the year it makes a claim.

Accountant RSM, along with trade bodies such as the BioIndustry Association, warns that the reform could disproportionately affect start-up companies and is lobbying for changes to the proposal. In the meantime, SMEs hoping to use the tax-credit scheme need to make their claims in full.

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