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Philip Hammond has delivered his third budget as the UK’s chancellor of the exchequer. The 2018 Budget strengthens the government’s commitment to Research and Development (‘R&D’) funding, which it recognises as being a key driver of economic growth.

The R&D tax reliefs, including the SME relief, are designed to encourage innovation. Their success is shown by a recent HMRC study which found that for every £1 of tax forgone £1.53 to £2.35 of R&D is stimulated.

The carrot
Demonstrating the government’s long-term commitment to R&D, and the Industrial Strategy ambition to raise total R&D investment to 2.4% of GDP by 2027, the 2018 Budget includes more support for cutting edge science and technology R&D and infrastructure allocating £1.6 billion to strengthen the UK’s global leadership in science and innovation.

“Technologies of the futures” are the big winners and are set to receive extra support in such sectors as digitally-enabled technologies, electric vehicle technology, quantum technologies, nuclear fusion, AI and data-driven innovation and Fintech.

The stick
While R&D tax reliefs are effective, HMRC has identified (and prevented) fraud attempts on the SME payable tax credit, worth £300 million in total. In these cases, companies were set up to claim the cash available through the payable credit even though they have no legitimate R&D activity. HMRC also identified structures set up deliberately to claim the payable tax credit despite having no or little employment or activity in the UK.

To address similar abuses the 2018 Budget has (re-) introduced the R&D tax credit cap for SMEs. From 1st April 2020, the amount a loss-making SME can receive in R&D tax credits will be capped at three times its total PAYE and National Insurance contributions liability.

This will deter abuse because fraudulent companies typically do not employ many people or pay PAYE and NICs. The cap will therefore ensure that the relief goes to companies that have a real UK presence.

Scott Henderson, Managing Director at Jumpstart, a leading innovation funding specialist says: “R&D tax relief has helped thousands of SMEs throughout the UK develop new and improved products, processes and services. The 2018 Budget makes it very clear that whilst the Government is committed to supporting innovation through tax incentives, the highest standards need to be applied in the self-assessment process to ensure only truly eligible activity is rewarded.”

"We were totally stunned at the amount claimed"

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