R&D tax relief consultation: HMRC proposals are detrimental for start-ups

Aug 31, 2020

With HMRC’s consultation on preventing abuse of R&D tax relief for SMEs having closed on Friday, Jay Bhatti, research and development tax manager at MHA MacIntyre Hudson, says HMRC must balance the fight against abuse with the right support for start-ups.

CURRENT HMRC proposals fail to consider the nuances of operations within smaller companies, which often have major research outlays, but a very low wage spend.

A key aspect of the proposal is to limit Cash Credit available from R&D relief to three times PAYE and national insurance liability. This risks stifling the growth and development of the small entrepreneurial businesses that drive the UK economy.

The proposals aim to prevent overseas companies using UK shell companies to disproportionally benefit from R&D tax reliefs. While fraud must obviously be addressed, a blanket approach is completely inappropriate.

Jay Bhatti

More effort should be made to ensure the rules work for different types of businesses. 

The mitigation steps included in the consultation are ineffective. An exemption on the first £20,000 of claims has been put forward, but some start-ups currently receive £100,000 or more through the scheme. The exemption is inadequate and could push companies to move development overseas.

The other suggestion is to link R&D claims directly to patents and intellectual property rights, but very few start-ups have fully realized development that can qualify as patented products, where application costs and timescales can be prohibitively high. The only beneficiaries are likely to be those linked to universities.  

For the three times wage spend rule to work, SMEs should be allowed to include spend on subcontractors in their calculations to more accurately reflect the scale of their R&D costs. As they stand the proposals risks stalling growth at a crucial time for UK businesses and the wider economy.

While abuse of the system needs to be tackled, HMRC should support the genuine innovators who rely on R&D tax relief incentives to flourish.

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