Question to the HM Treasury:

To ask the Chancellor of the Exchequer, what assessment he has made of the impact of the additional tax deduction for R&D costs for small and medium-enterprises on those organisation's ability to (a) recruit and retain staff and (b) maintain technological equipment.

As part of the ongoing R&D tax reliefs review, as announced at the Autumn Statement, the Government is reforming the R&D tax reliefs to ensure taxpayers’ money is spent as effectively as possible, to improve the competitiveness of the RDEC scheme, and take a step towards a simplified, single RDEC-like scheme for all.

The SME scheme costs twice as much as RDEC, and its cash value to firm is three times that of RDEC - yet it incentivises as little as 60p of additional R&D for each £1 spent, compared to as much as £2.70 additional R&D per £1 of RDEC. In addition, following the corporation tax rise from April 2023, the SME scheme would have become even more generous in cash terms and the Research and Development Expenditure Credit less.

There is significant error and fraud in the small and medium-sized enterprises (SME) scheme, with the generosity of the relief making it a target for fraud. By contrast, the separate R&D expenditure credit is better value but has a rate that is less internationally competitive.

Following these changes support for R&D investment will continue to increase, with R&D expenditure from businesses via tax credits estimated to increase from £37.2 billion in 2020-21 to around £60 billion by the end of the scorecard period, 2027-28. In addition, direct funding for R&D will reach £20 billion a year by 2024/25. From 2021-22 to 2024-25, this represents a 54 per cent cash increase in Innovate UK’s budgets and 70 per cent of Innovate UK’s grants to businesses go to SMEs.

The Government will consult on the design of a single scheme, and ahead of Budget work with industry to understand whether further support is necessary for R&D intensive SMEs, without significant change to the overall cost for supporting R&D.