Guest Blog: R&D Tax Relief, Our Policy Wish List
Changes to R&D tax relief in recent years have resulted in a seismic shift for the incentive and the technology businesses using it to fund innovation.
The government first announced plans to reform R&D tax relief back in 2021. While the introduction of a merged scheme this April finally marked the end of the consultation period, results remain to be determined over the coming years.
With the major parties making manifesto commitments to invest in R&D, innovation incentives specialist, ForrestBrown, reflects on changes the tech sector hoped for, what’s been delivered – and what should be on the next government’s agenda when it focuses on funding R&D.
Setting targets and measuring success
It was hoped that a statement of intent would clarify target sectors for R&D tax relief, its overall objective and how it should be measured. This has not been forthcoming, although HMRC has been more open about sectors it doesn’t expect to carry out R&D, such as care homes and pubs. This will help to educate these types of businesses – often the target of rogue agents – and should also contribute to raising standards across an industry that has seen enquiries into claims rise from around 1% to a reported 20%.
Measurement of R&D investment was a real sticking point over the consultation period. HMRC received criticism for its incomplete data on error and fraud, while the ONS was forced to revise estimates of business R&D spend. However, improved data on business R&D expenditure should enable the impact of R&D tax relief to be more accurately measured in future.
A priority for the next government should be to set a new target for R&D spend as a percentage of GDP, and updated research from HMRC on additionality and spillover benefits.
Administration of the incentive
Improving the administration of the incentive was also a key ask. In response, the new Additional Information Form (AIF) has been introduced. This must be submitted to HMRC before the relevant company tax return. While the introduction of the AIF caught out some, the hope is it will help improve compliance and continue to be reviewed to facilitate provision of the right information to HMRC.
The publication of Guidelines for Compliance (GfC3) on best practice and evidence to support R&D claims has also been a positive step. The task now will be to keep GfC3 up to date and to publicise it both internally within HMRC and externally.
Definition of R&D
Turning to the definition of R&D, challenges remain. While the definition has been tweaked to include advances in pure mathematics, a wholesale update remains outstanding. In the meantime, GfC3 has lots of great practical examples to help businesses understand the definition – something it was hoped would come from a wider review.
Streamline the relief
The hope here was that SMEs would move onto the RDEC model used by larger businesses but retain a higher rate of relief. In reality, most SMEs were moved onto RDEC through the introduction of a merged scheme, but at a much lower rate than the previous SME scheme. R&D intensive SMEs stayed on the SME scheme, effectively meaning that a single simplified scheme has not been achieved.
Ultimately, we’d prefer all companies to be on the RDEC model, because it offers greater certainty and simplicity. But there should be recognition that SMEs face greater challenges accessing funding for risky endeavours such as R&D, so a higher rate of relief makes good sense.
Elsewhere, we can point to positives in relation to fixing the broken rules around contracted out R&D and subsidies.
Overall picture
Reflecting on the reforms, there has been positive progress in some areas, but other aspects remain unresolved. The hope is that whatever form the new government takes, support for business innovation will be front and centre.
Read ForrestBrown’s policy wish list in detail here.
Authors
Jenny Tragner
- R&D tax incentive policy expert.
- 20 years of tax experience, including advising some of the UK’s best-known innovators.
- Provides advice on the most complex cases involving R&D tax reliefs, including the resolution of HMRC disputes.