Finding the Silver Linings in the R&D Tax Relief Changes

Headlines suggest that SMEs are set to see R&D tax relief claims cut by up to 45% following the Chancellor’s Autumn Statement – a rather gloomy prospect – but look beyond the top-line figures and this is a budget that focuses on both compliance and encouraging collaboration to improve R&D tax claim quality, which can only be a good thing.

Building on previous announcements designed to improve the rigour of the R&D tax relief process, this statement actually unlocks new opportunities for SMEs to fund R&D that will reinforce the value of accountants as a trusted advisor, Mike Dean, Managing Director, WhisperClaims explains.

R&D Tax Relief Overhaul

The initial responses from the accountancy industry to the recent Budget’s R&D Tax Claim changes have been universally – and understandably – negative. While there is no doubt that the decrease in SME additional deduction from 130% to 86% and the SME credit rate decrease from 14.5% to 10% will affect SMEs making claims, the reality is far more nuanced.

Yes, the Chancellor’s view of the market has clearly been skewed by media and industry negativity, where fee structures and “boundary pushing” have been consistent themes – remember the opening line of his statement regarding R&D tax: “I have also heard concerning reports of abuse and fraud in R&D tax relief for SMEs.” However, it is also widely acknowledged that clamping down on the rogue claims that have dogged the credibility of the market for years is long overdue.

As such, this statement clearly underlines HMRC’s commitment to enforcing a far more robust process for all stakeholders – a change that should be wholeheartedly welcomed and embraced by the industry.

The government also took this opportunity to announce additional funding for HMRC to investigate fraud, which will mean more scrutiny into claims. Building on the additional requirements due next April (including the requirement for claims to be endorsed by the claiming company and the need for a named provider) additional investigation will be vital in creating a more robust scheme and eradicating bad practice and this, too, is certainly welcomed.

Rewarding Collaboration

The changes announced in the 2022 Autumn Statement should also provide accountancy practices across the UK with an opportunity to rebuild that trusted relationship with clients involved in any R&D activity.

By increasing the Research and Development Expenditure Credit (RDEC) rate from 13% to 20%, the government has significantly increased the value of R&D relief for larger companies. While at face value this could look to unfairly disadvantage smaller innovators, it provides SMEs working in collaboration on R&D projects with access to the higher rate for these projects. Furthermore, companies that are leveraging grants for R&D will also benefit from this increased RDEC rate.

Whether deliberately or not, this shift will encourage greater collaboration across R&D, a process that is likely to lead to high quality innovation delivering more economic value. To achieve this level of collaboration requires a very robust commercial gateway process which will, by default, reinforce due diligence. Building on a stronger compliance process, this approach will reward organisations that are undertaking higher quality and higher value R&D activity.

Trusted Advisor

For accountants, these changes will undoubtedly increase the potential client pool. The ‘contingent fee’ providers will rapidly pull back from the smaller SME claims due to the lower income stream. The result will be not only less risk of clients being targeted by these third parties but also existing clients turning back to their trusted advisor for advice and support.

Furthermore, broader business understanding means an acuntant is also now far better placed to support businesses in this new R&D tax regime. For example, whilst in the past there were limited opportunities to explore funding options due to the ‘grant versus tax relief’ trade off, this budget has changed the dynamics.

Confidence and robust processes are key if accountants are to support clients to maximise the value of R&D funding. Investing in technology that supports a structured, repeatable, cost-effective approach will enable accountants to confidently offer a competitive fixed fee model to clients while building on their trusted advisor status to deliver tangible value.

Conclusion

There is no doubt that the industry has been taken aback by the Autumn Statement, but it is essential to retain some perspective. Tax relief claims are still important and valuable. 86% may be a significant drop but it is without any doubt a worthwhile benefit. Grants and collaboration now offer SMEs far more financial flexibility in the way they approach R&D activity and offer a major upside in available tax relief. And, critically, HMRC’s commitment to compliance will hopefully drive out the remaining rogue players and ensure accountants can remain the touchstone for financial advice and support for all clients.