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How R&D tax relief can help make Liz Truss’s ‘aspiration nation’ a reality

Director & Head of Policy
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In her speech on the steps of 10 Downing Street, the new Prime Minister, Liz Truss, talked about transforming Britain into an ‘aspiration nation…with high-paying jobs…and where everyone has the opportunities they deserve’.

While the cost-of-living crisis and energy bills are clearly at the top of Truss’s to do list, she cites business-led growth and investment as key to achieving her ambition to ‘get Britain working again’.

So, what role can research and development (R&D) play in meeting the current challenges? And how can R&D tax incentives unlock the UK’s potential to be a science and technology superpower?

At ForrestBrown we see first-hand the positive impact R&D tax incentives have for innovative businesses across the country. We’re passionate about the transformative power of R&D tax relief and want to see this harnessed even more effectively to get the economy ‘firing on all cylinders’.

The tax system can be complex, but we have identified three key recommendations for reform of R&D tax relief. Putting these ideas into action would provide a welcome boost for key industries and would benefit all parts of the UK.

Make net zero projects ‘R&D heroes’ with enhanced rates of relief

Fast-tracking new sources of energy and reducing our reliance on fossil fuels has never been more important. Enhanced rates of relief for R&D investment in projects which contribute towards these objectives would incentivise innovation in areas where margins are under pressure.  

This sharper sector focus could form part of a renewed statement of intent for R&D tax reliefs. This would include bringing definitions and case-studies up to date, giving genuinely innovative businesses the confidence to invest and reducing boundary-pushing by spurious advisers.

Read more about R&D tax relief and net zero projects.

Boost manufacturing capacity by making R&D capital allowances fit for purpose

Manufacturing has the potential to be the engine of UK economic recovery, particularly beyond London and the south-east. And manufacturing R&D is more capital intensive than other sectors, with manufacturing firms also more prevalent in less economically prosperous parts of the UK.

Investment in innovation is required to ensure UK companies keep pace in a global market, but R&D tax relief is focused on revenue expenditure, while the attractiveness of the current capital allowances regime for R&D has been eroded by the introduction of the Annual Investment Allowance (AIA) and the super-deduction.

A more generous rate for R&D capital allowances (RDAs) is required to better incentivise investment in equipment and facilities for R&D purposes. The current system also largely ignores companies in a post-R&D loss-making position. This is because, unlike for other types of R&D qualifying expenditure, RDAs do not generate a cash credit.

A more wide-reaching change would be to consider removing the requirement for expenditure to be revenue in nature from the R&D tax incentives legislation. This could have the additional benefit of simplifying circumstances where R&D expenditure has been capitalised for accounting purposes as an intangible asset, but a separate assessment is required to determine the correct tax treatment.

Support SMEs by simplifying the R&D tax incentive

Numbering more than 5.5 million and accounting for 99.9 per cent of the private sector business population, SMEs are the backbone of the UK economy – and are particularly prevalent in high-intensity R&D sectors such as software. But despite this, figures show a lower level of additionality for R&D tax relief to SMEs when compared to the returns from the RDEC for larger companies.

In recognition of the important role SMEs play in the innovation ecosystem – and to address the additionality gap – the SME R&D tax incentive should be updated to mirror the RDEC model for calculating relief but retain the higher rate of generosity.

This simplifies the system (given that many SMEs already access both types of incentive) and recognises the advantages of the RDEC model – including greater visibility of the credit above the line in company accounts. This visibility in the accounts strengthens a company’s financial statements and ensures that R&D tax relief, and the activities generating it, form part of the management agenda discussed by investment decision makers.

What happens to the R&D tax relief review under the new government?

What began as an ambitious ‘root and branch’ review of R&D tax reliefs under the previous administration is at risk of petering out and delivering only piecemeal changes. The new Prime Minister and her Treasury team have an opportunity to take a fresh look at R&D tax incentives once the most immediate priorities have been addressed.

In the meantime, ForrestBrown will continue to champion reform and engage with consultations to enhance support for our most innovative businesses, generating growth and jobs across the UK.

Read more policy-level insight from ForrestBrown in our R&D consultation responses.