R&D tax relief plan to boost productivity, innovation and drive economic growth

Ahead of the Chancellor’s Budget, techUK sets out a plan for the Government to restore confidence in the UK’s flagship R&D tax relief scheme, prioritising longer-term policy stability, effective administration from HMRC and better support for SMEs.

The Government has tough choices to make in the upcoming Budget and Spending Review. Better incentivising businesses to invest in R&D is a choice that will yield substantial returns. This is a growth opportunity, where firms that consistently invest in R&D are predicted to be 13% more productive than those that don’t. For every £1 of tax relief granted, up to £2.70 of additional R&D investment is also generated.

Committing to stability of the credit and tackling fraudulent claims were the right ambitions. Under the previous Government, there were five changes in the last parliament alone. Our members consistently call for policy stability and certainty to instill investor confidence.

Below, we outline practical, low-cost actions that the Government can take to ensure the R&D tax credit remains fit for purpose and taxpayers’ funds are used effectively. Recognising the number of recent changes, we balance reforms and set out a longer-term plan to make the credit more competitive and empower an under-delivering HMRC to tackle fraudulent claims in a fair and just way.

Download our action plan here.

Our recommendations have been developed with insight and expertise from our members, including SMEs and larger tech firms, and tax experts. They focus around:

Prioritise improving HMRC’s delivery of R&D tax reliefs.
Make changes to the R&D Tax Credit Scheme to drive further investment into the UK.
Get started on a longer-term five-year plan for the delivery of R&D tax reliefs.

Setting the scene

Since its introduction, the UK's R&D tax credit scheme has been key to driving innovation by reducing companies' corporation tax or providing credit payments based on R&D spending. The scheme is especially vital for smaller firms, helping to reduce risks and improve cash flow.

Of note, in 2021-22, £7.6 billion in R&D tax relief supported £44.1 billion in R&D expenditure. However, reforms under the previous Government, including a merged scheme effective from April 2024, have reduced benefits for many SMEs and added complexity around subcontracted R&D. Additionally, HMRC’s inconsistency, and often failure, in administering the credit effectively, has further hindered the scheme’s effectiveness.

Step one: Improve HMRC’s delivery of R&D tax credits

While the ambition to tackle fraud is the right one and HMRC's initial efforts to address R&D tax credit fraud are commendable, there is a risk that a poorly regulated compliance process may be causing as much, if not more, harm to the UK economy than the fraud that HMRC initially allowed to proliferate.

Currently, HMRC’s services have been falling below expected service levels, resulting in added costs for businesses and the Government. In May 2024, the National Audit Office revealed that new digital services had not reduced service pressures as much as predicted. techUK members outline consistent reporting errors and delays from HMRC.

To combat this, techUK recommend:

Using the ‘R&D tax reliefs: Expert Advisory Panel’ announced in Spring 2024 to inform recommendations around HMRC’s administration, operation and delivery of R&D tax reliefs.
Re-introducing geography specific expert teams within HMRC. This would create sector specific specialists due to the clustered nature of R&D investments.
Commiting to providing the human capital and data to deal with the volume of cases and meet cases where self-assessment comes into question. This should be accompanied with clear guidance and reasoning for challenging and/or rejecting a claim.

Step two: make changes to R&D tax reliefs to drive further investment into the UK

Any immediate changes to the R&D tax reliefs should prioritise (i) changes to HMRC delivery, (ii) anchoring investment in the UK and (iii) supporting SMEs innovation and challenges for risky endeavours such as R&D.

Key to this, is extending the qualifying categories to include capital expenditure, such as plant and machinery, used solely for R&D purposes. The OECD currently ranks the UK’s R&D tax relief scheme for SMEs as the 11^th most generous of 44 countries, and the UK’s R&D tax relief scheme for large companies is currently ranked as only the 23^rd most generous. Better recognition of capital in UK R&D tax credits would make the UK tax system more internationally competitive and work to anchor investment in the UK.

Practical interventions that the Government can take include:

Introducing a de minimis qualifying R&D expenditure threshold for the R&D tax credits scheme, with the purpose of reducing HMRC caseload and removing wholly non-compliant claims.
Extending the qualifying categories to include capital expenditure, such as plant and machinery, used solely for R&D purposes. This would anchor innovative investment in the UK.
Expanding ERIS (Enhanced Research and Development intensive support) to include profitable SMEs.
Revisiting the merged scheme to improve clarity around subcontracted R&D and to support SMEs innovation, recognising they often face greater challenges accessing funding for risky endeavours such as R&D.

Step three: Get started on a five-year plan for R&D tax reliefs

Our members thrive on stability, enabling them to plan with greater certainty and make longer-term investment decisions. Given the consultation process for a merged scheme has now ended, techUK believe there is an opportunity to boost the UK’s competitiveness, and instill confidence, with a longer-term five-year plan.

We reiterate that supporting investment in R&D across our membership will help to deliver on the Government’s missions – whether reducing waiting times for the NHS, securing the UK’s energy security or securing the highest sustained growth in the G7.

To get started on a longer-term plan, we propose:

Revisiting the policy objectives of the R&D tax relief scheme, with inward investment and UK competitiveness at the heart of this.
Providing policy certainty by setting a new target for R&D spend as a percentage of GDP, with updated research from HMRC on additionality and spillover benefits. This should complement HMT’s plans to review the credit over a five-year period.

The UK is at a critical juncture, and has the opportunity to remain a world leader in technology and innovation. A robust and competitive R&D tax relief scheme is central to achieving this goal, driving business investment in R&D, and supporting the Government’s broader economic ambitions.

techUK look forward to continuing to work with the Government on this topic.

For any questions, or to discuss this further, reach out to the digital economy team:

Neil Ross

Associate Director, Policy, techUK

Samiah Anderson

Head of Digital Economy, techUK

Mia Haffety

Policy Manager - Digital Economy, techUK

Authors

Mia Haffety

Policy Manager - Digital Economy, techUK

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