Question to the HM Treasury:

To ask the Chancellor of the Exchequer, with reference to the report entitled The management of tax expenditures, published by the NAO on 14 February 2020, Session 2019-20, HC46, what recent discussions he has had with the Secretary of State for Business, Energy and Industrial Strategy on reducing the level of R&D tax relief abuse.

The Government offers two separate R&D tax reliefs: the Research and Development Expenditure Credit (RDEC) and an additional corporation tax deduction for Small and Medium-sized enterprises (SMEs).

Smaller companies generally claim for their R&D costs under the SME scheme, rather than RDEC, since the rates of relief under that scheme are more generous. In 2019-20, 76,225 SMEs claimed under that scheme, ten times more claims than a decade earlier. A company qualifies for the SME scheme if it has less than 500 employees with either an annual turnover under €100 million or a balance sheet under €86 million.

Large companies can claim RDEC for costs incurred on R&D projects. RDEC replaced the large company scheme in April 2016. SMEs can also claim RDEC where they are performing R&D under contract from another company or where they have received a grant or subsidy for their R&D project.

The Government is currently undertaking a review of R&D tax reliefs. The objectives of the review are to ensure the UK remains a competitive location for cutting edge research, that the reliefs continue to be fit for purpose, and that taxpayer money is effectively targeted.

This review is considering reasons for why the cost of support for both the SME and RDEC schemes has increased substantially in recent years. The Government is concerned about abuse in the schemes and set out a comprehensive list of plans to tackle abuse of the R&D tax reliefs in November 2021.

The Government is continuing the review on R&D tax credits and will consider further reforms ahead of the Autumn.