How could new cash credit proposals impact SME’s?
July 05, 2019
By David Turner and Samantha Butcher, PwC Innovation Incentives Group Senior Managers
New proposals have been made by the government to introduce a cap on R&D cash credits claimable by Small or Medium-sized Enterprises, known as SMEs.
To engage with wider opinion on the issue a public consultation has been launched, debating whether this cap should be implemented for three times the total PAYE and NIC liability of the claimant company, from April 2020.
Whilst we are fully supportive of the intentions of the cap in looking to combat perceived abuse, a survey we conducted with our clients has suggested that a significant proportion (33%) of ordinary claimants may be impacted, with the biotechnology sector particularly affected.
In our consultation response we recommend the government considers modifications to the cap and/or other changes to the SME scheme that could make it more targeted and to some extent mitigate against the adverse impact of the cap on these businesses.
Value of R&D credits
R&D credits are seen as an important form of support for innovative businesses, which are vital to the future strength of our economy. The R&D credit paid to SMEs is up to 33% of the company’s expenditure on qualifying R&D, resulting in a cashflow benefit for claimant companies. According to 2018 HMRC statistics, there had already been 39,960 R&D claims made for the 2016-17 year, of which 34,060 were in the SME regime equating to £1,835m of benefit.
How could SME’s be affected by the proposed cap?
From our experience, we expect the qualifying R&D businesses most likely to be adversely impacted by the cap to be those SMEs which are heavily dependent on external support for conducting their R&D. Two main types are:
- Innovative start-up businesses - those with a small staff headcount who are utilising external experts to assist with their R&D activities and who use funding from sources such as R&D credits to continue their investment in R&D and grow their business
- Businesses in particular sectors - those working in areas such as biotechnology, where significant payments are made to third parties, such as Contract Research Organisations (CROs) to perform clinical trials on their behalf.
It is a strategic goal of the Life Sciences Industrial Strategy to “create four UK companies valued at over £20bn market cap in the next 10 years”. Introducing a cap on the SME R&D credit could disproportionately harm those biotechnology businesses which might become tomorrow’s major global life sciences businesses.
As part of our response to the consultation we invited SMEs to answer a short survey on the proposed cap and its possible variants. Some of the results of the survey were:
- 33% of respondents thought they would be affected by the cap, which we understand is higher than government estimates on the likely proportion of claimants impacted.
- For those respondents who expected to be impacted by the cap, 70% were from the Pharmaceutical, Medical Devices and Biotechnology sectors.
- For half of the businesses who said they would be impacted by the cap, over 80% of their employees are involved in R&D.
As part of our survey and our response to HM Treasury we have also shared a number of ideas on possible changes to the proposed cap as well as to the SME R&D credit, that would make it more effective for SMEs and asked for input from our clients in respect of this.