Jeremy Hunt set to overhaul UK’s R&D tax credit scheme for SMEs

Jeremy Hunt will review Britain’s ‘flagship industrial policy’ this week after warning that billions of pounds in R&D tax credits for small businesses offer poor value for money and are open to fraud.

The Chancellor is expected to make tax credits for SMEs less generous, fearing that without reform their cost could double to nearly £9billion by 2027, according to people briefed on the week’s autumn statement next.

While large business R&D has been significantly improved by the tax credits, use of the system by SMEs has had a much more mixed record, with a high profile of abuse cases.

Earlier this year, Prime Minister Rishi Sunak promised reforms when he was chancellor, saying that despite spending “huge and rapidly growing sums” on the program, he was not doing enough to boost the economy. growth.

The crackdown, part of Hunt’s push to plug a £55billion fiscal hole, was inspired by a Cambridge University report last year, which asked: “The UK’s flagship industrial policy Is Uni a costly failure?

Based on figures from the Office for Budget Responsibility, government insiders said the SME scheme cost £1.2bn in 2015-16 but had risen significantly to £4, £2bn in 2020-21 and could reach £8.9bn in 2026-27.

They said Hunt needed to scale back the SME R&D program, accumulating some of the savings, but also shifting some of the money to areas that offer better value. The Treasury declined to comment.

This decision will be criticized by business groups. The Federation of Small Businesses wrote to Hunt last month warning him against targeting a program that “has worked, especially a program of such importance for growth.” He said R&D tax credits had been “a big part of [the SME] success story,” adding that “attempting to pull the rug out from under small business innovation felt like a misinterpretation of the few data points.”

Onward, a center-right think tank, agreed in a report this month that reform was needed, but that “R&D tax incentives have been successful in increasing business R&D to meet our national goal of R&D expenditure eight years earlier”.

But the Cambridge report found that companies’ self-funded investment in R&D was 10-15% lower than it was before tax credits were introduced in 2000.

HM Revenue & Customs assessments found that the relief for SMEs offered relatively poor value for money, although it now cost more than the tax credits offered to large businesses.

Sunak signaled earlier this year, when he was still Chancellor, that he was considering reforming the R&D tax credit system, but was at the time looking to both improve and improve it. expand, as business investment was significantly lower than in European rivals such as France and Germany.

It promised to expand eligible spending to cover data and cloud computing expenses, but cut costs by refocusing R&D relief on UK-based activity.

But while at the Treasury, Sunak had also made a broader pledge to cut corporate taxes on productivity investment, including options to replace the “super deduction” tax break on spending in capital which ends this year.

However, people familiar with the talks with officials said they were not optimistic that Sunak would support companies through such investment incentives.

HMRC said: “We recognize that the R&D tax relief has been susceptible to fraud, and changes to the system have been announced to address this issue.”

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