1. News
  2. R&D tax relief: what’s left on our policy wish list

R&D tax relief: what's left on our policy wish list

Director & Head of Policy
Read time:
Woman checking a to do list

The changes enacted to R&D tax relief over the last two years have resulted in a seismic shift for the incentive – and the businesses using it to fund their investment in innovation. The consultation period is over, but work remains to fine tune the implementation.

Three years have passed since the government first announced its intention in the Spring Budget 2021 to reform R&D tax relief. During that time, the industry has seen various consultations, and structural changes to the incentive, some welcome in their intent and others less so. The consultation period has ended, but the results of these R&D tax changes remain to be determined over the coming years. So, as we gear up for the next stage of that journey, it’s worth reflecting on the consultation process and reminding ourselves of what we originally asked for, compared to where we are now.

Statement of intent

Clarity of purpose is essential and affects all elements of R&D tax relief. To reflect this, it was hoped that a government statement of intent would be issued to clarify the target sectors for R&D tax reliefs, its overall objective and how it should be measured.

While this was never achieved, HMRC has brought some welcome clarity by being more open about the sectors it does not expect to carry out R&D, for example, care homes, childcare, personal trainers, pubs and restaurants. This will help to educate these types of businesses – often the target of rogue agents – to protect against errors and should also contribute to raising standards across an industry that has seen enquiries into claims rise from around 1% to a reported 20%.

This sector-targeted approach will be further shored up by the establishment of a new expert advisory panel, which plans to draw on expertise from key R&D intensive sectors such as life sciences and advanced manufacturing to support the administration of the incentive.

A more considered approach was also taken to the new contracted out R&D rules. HM Treasury and HMRC worked together to issue a policy paper explaining the intention, followed by draft legislation, a period of consultation and iterations of guidance. This process resulted in a good level of clarity in an area of major change and potential complexity, and the government is to be applauded for it.

Measurement of R&D investment and the cost of R&D incentives has been a real sticking point over the course of the consultation period. HMRC received criticism for its incomplete data on error and fraud, while the ONS was forced to make material revisions to its estimates of business R&D spend.

Poor data is a driver of poor policy decisions, so this backdrop to the reforms does raise questions. However, revised ONS methodology is now in place, as well as increased data being gathered by HMRC via its compliance activities. Improved data on business R&D expenditure should enable the impact of the changes to R&D tax relief to be more accurately measured.

With a General Election imminent, a priority 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

Clarity was also the key ask for improving the administration of the incentive. We asked for supporting documentation to be a mandatory requirement when making a claim for R&D relief, and for better, more accessible guidance for businesses wanting to get things right first time.

The desire to make supporting documentation for R&D claims a legal requirement has translated into the new Additional Information Form (AIF), which must be submitted to HMRC before the relevant company tax return. While the introduction of the AIF caught out some companies, the hope is that it will help improve compliance and continue to be reviewed to ensure that it facilitates the 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 forward. The task now will be to keep GfC3 up to date and to publicise it both internally within HMRC and externally. An update to HMRC’s Corporate Intangibles Research and Development (CIRD) manual to be consistent with GfC3, would also be welcome.

Definition of R&D

As we look to other areas on our wish list, not least the definition of R&D, challenges remain. What we sought was a review and update by the government of the definition of R&D in the DSIT (formerly BEIS) Guidelines, with the aim of modernising the terminology and examples and improving accessibility. While the definition has been tweaked to include advances in the field of pure mathematics, this did not arise from a review of the document, leaving a wholesale update outstanding.

It was suggested that independent oversight from HMT/BEIS may also be helpful, but while BEIS has become DSIT, there still appears to be a disconnect between it and HMRC when it comes to R&D tax reliefs. There remains scope for DSIT to lead a review of the definition and to take a more active role in supporting HMRC, something that the expert advisory panel may be able to help with. It will be important to ensure that the panel is transparent in respect of its makeup, format and the discussions held, reflecting the broad and ever evolving nature of R&D activities.

In the meantime, GfC3 has lots of great practical examples to help businesses understand the definition – something that was hoped for from the recommended review of the definition. The challenge now will be to keep this guidance up to date by reviewing it periodically and to publicise its existence to give it the best chance of having a positive influence.

Streamline the relief

The hope here was that SMEs would move onto the RDEC model but retain a higher rate of relief. In reality, most SMEs did get 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 was never achieved.

Ultimately, we would prefer all companies to be on the RDEC model, because it offers greater certainty and simplicity than the super-deduction mechanism. But there should be recognition, as previously established, that SMEs face greater challenges accessing funding for risky endeavours such as R&D, so a higher rate of relief makes good sense. R&D intensive SMEs are important to the future prosperity of the UK, so both profitable and loss making SMEs of this type should be rewarded, potentially at a higher level of generosity again. But inevitably achieving these changes would be costly for a future government.

The current model would, however, allow for various interim options which could improve the relief available to SMEs including:

  • Expanding ERIS by reducing the intensity threshold;
  • Expanding ERIS to include profitable SMEs; and
  • Increasing the ERIS enhancement and/or credit rates.

Given the scope for these interim options, the area should be kept under review.

In tandem, we would like to see the government consult on improving Research and Development Allowances (RDAs) with the aim of better incentivising capital expenditure supporting innovation. This topic was included in the initial phase of the consultation, but not taken further, with the super-deduction and full expensing grabbing headlines instead.

Elsewhere in the theme of simplification, we can point to positives in relation to fixing the broken rules around contracted out R&D and subsidies. Contracted out rules have been addressed and, while they’re not perfect, the policy process has been handled well, and the subsidy rules abolished entirely (arguably the ultimate simplification). Yet, while contracted out rules have improved, complexity remains in provisions governing Externally Provided Workers (EPWs), which would benefit from review in the future.

Agents and compliance

At the outset of the consultation, and before that in the separate consultation on raising standards in the tax advice market, we asked for three things:

  1. Mandatory professional body membership for professional tax advisers;
  2. Formalising processes for R&D agents to interact with HMRC; and,
  3. Reform of the Research and Development Communication Forum (RDCF).

The first point is something to which the industry must turn its immediate attention, following the resurrection of the Raising standards in the tax advice market consultation, which is progressing again. Mandatory professional body membership is one of three options being explored, along with changes to the way that agents interact with HMRC. Responses to the consultation were due by 29 May and the hope is that the government will act on these, and reform won’t be kicked into the long grass again.

While the AIF has made the role of the R&D agent much clearer, there has been no reform to the RDCF since it was rebranded (having previously been the R&D Consultative Committee), and it is, regrettably, even less effective under its new banner. We continue to call for its reform.

Overall picture

For those close to R&D tax reliefs over this period, the consultation has been a prolonged period of much uncertainty and disruption. The consultation has ended, but the transitional period for the changes made will continue for months and years to come.

Reflecting on the reforms as a whole, there has been positive progress in some areas, but other aspects remain unresolved. With a general election campaign underway, it is hard to know what priority these will be afforded over the coming weeks and under any new government.

In the meantime, we continue to support initiatives to raise professional standards and evolve processes across the tax industry, which can only be of long-term benefit to HMRC, as well as professionals and their clients. The hope is that whatever form the new government takes, support for business innovation will be front and centre.

R&D tax incentive wish list

With the major political parties making manifesto commitments to invest in R&D, the yet-to-be-implemented initiatives outlined above would provide a strong starting point from a technical perspective.

In no order of priority, we would like to see:

  • A new target for R&D as a percentage of GDP.
  • HMRC be given the right level of funding to undertake effective compliance.
  • Better data on business R&D investment from the Office for National Statistics.
  • Updated research from HMRC on additionality and spillover benefits.
  • A DSIT-led review the definition of R&D and for the department to take a more active role in supporting HMRC.
  • A transparent expert advisory panel, which reflects the broad nature of R&D.
  • Up-to-date guidance that’s reviewed periodically, including regular updates to GfC3 and a material update to the CIRD manual guidance to ensure consistency.
  • Better publication of updated guidance internally and externally, to improve consistency in compliance actions.
  • Continued review of the AIF to ensure that it facilitates the provision of the right information to HMRC.
  • The relief afforded to SMEs kept under review. We would love to see all companies on the RDEC model, but with SMEs getting a higher rate, and R&D intensive SMEs (profitable and loss making) getting an even higher rate. Though we accept that this would be costly.
  • The continuation of the raising standards consultation to explore options, leading to mandatory professional body membership for professional tax advisers.
  • Consultation on improving RDAs.
  • Reform of the Research and Development Communication Forum (RDCF).

ForrestBrown can help

To find out more about how ForrestBrown can help you navigate the changing R&D incentive landscape, speak to our team of experts.