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Spotting the opportunities in a changing tax landscape

After a year of political change, the Autumn Statement brought yet further transformation, with plans unveiled to overhaul flagship Government research and development financial policy. Here, Steven Hugill speaks to Jonathan Scott, tax partner at accountancy and business advisory firm Haines Watts, to learn more about the opportunities available to businesses in the changing tax landscape.

The last three years have done many things, not least keep lexicographers rather occupied.

From COVID-19 to the dramatic shifting of global political, economic and social environments, we’ve all been searching for definition.

And, as watershed change to flagship Government research and development (R&D) financial policy is readied for introduction, many business owners are once again looking for meaning, seeking to understand how the revision could affect their fortunes.

With small and medium-sized enterprise (SME) R&D tax relief – a backbone for many start-ups – set to be significantly reduced, and the research and development expenditure credit (RDEC) model – used by companies with more than 500 staff and turnover in excess of €100 million – primed to rise, a new picture will soon emerge.

Jonathan Scott, tax partner at accountancy and business advisory firm Haines Watts, says: “The main bulk of R&D relief goes to SMEs, they are the ones that are going to be hardest hit by these changes.

“And the proposals create a double compound for loss-making SMEs, with the worry being we’ll see a lot of innovative start-ups not get through their first cycle of R&D.”

However, Jonathan says the shift also presents many opportunities for business owners, with numerous financial support measures at their potential disposal.

They include the Government’s Patent Box scheme, which encourages operators to retain and commercialise intellectual property in the UK by applying a lower, ten per cent rate of corporation tax to profits earned from inventions.

Jonathan says: “R&D tax relief has been such a lifeblood for businesses for the last 20 years that many haven’t explored other options.

“But there are a number to consider.

“Some might be running calculations – which we are doing for clients – around claiming under the RDEC model, as opposed to the SME model, to help with cashflow and prepare for what many expect will be a slimming down of policy by the Government to eventually create one relief scheme in the coming years.

“Others are looking at Patent Box, which has potential to more than half tax bills. This represents massive benefit for SMEs, and we’re seeing our largest ever uptake.

“Historically, there has been a perception that getting a patent costs six figures, but in essence you can get one on some inventions in the UK for around £5,000.

“And it provides a real commercial boost, because companies can put patent numbers on inventions and marketing material, increasing exposure and potential market share.”

Grant funding is another fertile area of support, as are legislative changes by HMRC to include datasets and cloud computing costs in R&D relief.

Jonathan adds: “In the past, the region has carried a kind of mentality that, ‘if it looks too good to be true, it probably is’.

“But there are many pots out there, both locally and nationally, that can provide financial assistance, with Innovate UK, for example, being a great source.

“Businesses just need to know where to look, and what type of sectors and organisations these funds want to support.

“Similarly, the allowing of additional computer and data costs around R&D claims represents a boost.

“Software and data is being used increasingly as companies move from physical prototypes to the metaverse, and we’ve got a lot of tech firms in the North East, including many that work on video games, which could really benefit from the change.”

Another significant area of change to consider, says Jonathan, is new HMRC regulation focused on eliminating spurious claims.

Highlighting that eight people have been arrested for submitting fraudulent R&D tax relief applications, Jonathan says it is imperative organisations understand the new matrix while engaging the support of a qualified tax firm, such as Haines Watts, which are governed by ethics and standards.

He says: “Tax isn’t a regulated marketplace, and a lot of R&D advisors have sprung up in recent years.

“HMRC’s legislation will bring things back into line, because a key element includes a demand for all company tax returns to include an advisor’s name.

“That means enquiries will be able to hone in on individuals or agents if claims can’t be backed up.”

The changes to financial policy and fraudulent activity come against the backdrop of the first fall in the value of UK R&D tax relief for more than 20 years.

According to latest HMRC figures, firms claimed an estimated £6.6 billion during the 2020/2021 tax year, which was four per cent down on the £6.9 billion recorded in the previous 12 months.

However, Jonathan says the mechanism remains a key strategic option in ensuring financial stability.

He says: “There are multiple reasons for the fall in value, one of the major ones being that this is the first set of statistics we’ve seen since the pandemic.

“So, as well as the impact of furlough on innovation, some businesses may have had to reassess their cash flow needs, meaning some companies may have been more reserved in claims and others, while eligible, may not have claimed at all.

“The figures can also be altered by start-ups changing their status from SME relief to RDEC following private investment, and, naturally, some businesses have probably asked themselves if now is the best time to invest in an R&D project.”

Jonathan adds: “We’re in the middle of a massively changing landscape, and SMEs are bearing the brunt of the cost of living crisis, the increase in tax rates and the increase in wage inflation.

“It is tough, and there are only so many ways to turn.

“And that is why having an arsenal of tax reliefs, of grant funding and multi-faceted advice, is key to plugging a cashflow hole.”

Government changes at a glance
– Headlined by a proposed cut to the existing SME deduction rate, from 130 per cent to 86 per cent, the Government’s changes also include lowering the SME credit rate from 14.5 per cent to ten per cent, while increasing the RDEC rate from 13 to 20 per cent.