R&D tax relief capped for small businesses

published 4 June 2019

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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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.