Why start-ups are going to war with Jeremy Hunt on R&D tax

When Chancellor Jeremy Hunt rolled out plans to scale back research & development (R&D) tax credits for start-ups last year, there followed an almighty backlash from small business groups.

The Federation of Small Business warned Hunt that he would create an “innovation wasteland” and consultancy firm Ayming said the plans risked scuppering the UK’s ‘science and tech superpower’ dreams.

The furore forced a soft turnaround as the plans were scaled back at the budget in March. But now, as he prepares to deliver his Autumn statement next week, the Chancellor and HM Revenue & Customs are facing a new wave of attacks and fresh calls for an overhaul.

According to a new report from lobby group The Startup Coalition, the current regime is an “unfolding nightmare” that is “killing” small businesses, choking off investment and driving start-ups overseas.

The group, formerly known as Coadec, has published a report highlighting what it says are “severe failings” in the current regime that are losing small businesses an average of £100,000 a year.

Hunt’s scaling back of the plans last autumn was designed to clamp down on fraud and boost the Treasury’s tax take. While the plans were toned down, the changes introduced from the 1st of April saw the amount of R&D spend that start-ups can claim back slashed from 33 per cent to 18.6 per cent. 

In their new attack, however, the Startup Coalition has claimed that “poor administration” is compounding an already lacklustre regime, with 84 per cent of business founders now mulling moving their startups overseas.

“The R&D tax credits scheme isn’t working. The scheme has been cut and it’s being administered badly. Tech startups are paying the price,” said Startup Coalition chief Dom Hallas. 

“We need action at the Autumn Statement. Without changes, there’s a risk that we see this unfolding nightmare killing Britain’s future growth companies — and killing Britain’s future growth prospects along with them.”

The group, which helped orchestrate the rescue of collapsed lender Silicon Valley Bank earlier this year, is urging Hunt to tweak the rules for the ‘enhanced’ tax credit to ensure more innovative firms are able to access the more generous scheme based on R&D intensity.

R&D credits provide tax breaks for companies looking to offset the cost of expensive innovation projects. The proposed tweaks from the Startup Coalition would see R&D-heavy firms offered more allowances than those with one-off expenditures, which are seen as more susceptible to fraud.

Fears of widespread fraud in the scheme have some basis. Figures from HMRC over the summer showed that nearly a quarter of R&D tax relief was lost to fraud and error. The department revised up its estimates between 2020 and 2021 from 5.5 per cent to 24.4 per cent.

An investigation by the Times last year found that claimants for the scheme included a launderette that said it would lower temperatures on its washing machines and a firm that clawed back cash through the credits for staff performance reviews.

The Startup Coalition has proposed introducing a minimum spend floor that could ease the strain on HMRC and eliminate some of the bogus claims from companies.

However, there are no signs of a great turnaround yet.

A government spokesperson told City A.M. the R&D tax reliefs are still a “crucial driver of innovation, growth and productivity, and will support around £60bn in business spending by 2027-28”. 

“The government has introduced a new £500m per year R&D scheme to help around 20,000 SMEs and doubled the number of HMRC staff on hand to help make claiming easier, quicker and more compliant,” they added.