HMRC R&D tax relief proposals ‘detrimental’ for start-ups

HMRC’s consultation on preventing abuse of R&D tax relief for SMEs, which closes on 28 August, must “balance the fight against abuse with the right support for start-ups”, MHA MacIntyre Hudson has said.

Jay Bhatti, research and development tax manager at the firm, said 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.

He added that a key aspect is to limit Cash Credit available from R&D relief to three times PAYE and national insurance liability, as 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 disproportionately benefit from R&D tax reliefs. Bhatti said while fraud must “obviously be addressed”, he noted that a blanket approach is “completely inappropriate”.

Bhaati said: “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-realised 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.”

He added: “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 risk 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.”