Expert questions Government proposals to streamline tax relief

Government proposals to streamline the research and development (R&D) tax relief system have been called into question by top 10 accountancy firm Azets.

The plans would mean merging the two current schemes and potentially revamping permissible qualifying activity and claimant criteria.

A consultation on the proposals by HM Treasury and HM Revenue & Customs concluded last month with a new scheme which could be set to be implemented by as early as next April.

Azets, the UK 's largest regional accountancy and specialist business advisor to SMEs, surveyed 42,000 client businesses as part of its response to the proposals.

Just 12.8 per cent of respondents thought the proposals for a single scheme to be positive, 51.3 per cent considered it negative and 35.9% were undecided as to its potential impact.

Tim Croft, Azets ' national head of R&D Tax, has written to the Government detailing the results of these two surveys and adding the firm 's own technical queries.

He said: “The reason we sent in the letter was severalfold. We are a significant player in this field of tax advice and we should let the Government know our own thoughts. We have a voice that should be listened to.

“Also, because we are the largest firm in the country with access to the SME market, we went out to our SME client base and polled them to garner their important opinions. Their feedback is important. ”

“To be effective in its primary purpose of encouraging innovation, any single scheme needs absolute clarity on permissible qualifying activity, clear compliance guidance on claimant criteria, sufficiently attractive financial reward to both encourage claims and avoid overseas migration and be simplistic to administer.

“There is some doubt as to whether what is currently proposed will achieve this. It is hugely frustrating. The scheme needs to be set out in a better way than the Government is proposing.

“It is unlikely that the scheme as it is described, will encourage the SME market to innovate. That 74 per cent of Innovate UK funding is awarded to SMEs demonstrates that in a competitive environment (which the Innovate UK application process largely is), SMEs are deemed to be undertaking crucial R&D activities. ”

He also warned that a less attractive scheme might lead to a talent drain to the near continent where businesses might enjoy better trading conditions.

The current R&D tax credits system goes back to 2000 when the European Union, concerned that innovation was being lost to other continents, established what is now known as the SME Scheme, deliberately aimed at small to medium sized companies.

In the UK large companies lobbied the Government heavily for a second scheme. This led to the formation of the large company scheme in 2002, which has been through a number of iterations over the intervening years and is known as the RDEC (Research and Development expenditure credit) scheme.

Accounting for the two schemes has remained completely different. In the SME scheme all adjustments are made on the Corporation Tax return, with very little, if any, disclosure in the accounts whatsoever or note to say that innovation is taking place.

The Government 's last Autumn and Spring statements have more closely aligned the generosities of the two R&D tax relief schemes, helping with the case for a simpler scheme.