R&D investment remains key to large business success despite additional compliance complexity

A combination of legislative change and increased compliance activity by HMRC has transformed the R&D tax relief landscape for large businesses in recent years. But while the generosity of RDEC has increased, so too has the complexity facing large businesses claiming R&D tax relief, and their perception of the risk involved. For many, 2023/24 will yield a healthy return, while longer term 2024/25 and beyond might see a slump as restrictions on overseas expenditure start to bite.

Beyond the complexity and potential reduction in value though, the benefits of the relief for large businesses remain considerable. Investment in R&D and innovation are central to commercial success – and continued access to R&D tax relief plays a crucial role in supporting that.

Not only that, but the spillover benefits to the wider economy from large businesses investing in R&D can be significant. It drives economic growth, helps local and national economies to maintain competitive advantage and fosters a culture of innovation.

So, while accessing R&D tax relief may not be without its challenges, it remains a valuable tool for any large business investing in innovation.

What do large businesses say?

Recent statistics from HMRC show that large companies received £2.5 billion in R&D tax relief in 2022/23, supporting R&D expenditure of more than £25 billion. 

Just last week, ForrestBrown’s report presented in partnership with Winmark – Unveiling the impact: how are businesses navigating the evolving landscape of R&D tax relief and innovation incentives? – underscored how important R&D tax relief is in supporting those businesses. 

The survey of senior finance and tax professionals from a range of key industries confirmed that investment in R&D is central to commercial strategy. Of those surveyed, 38% said that their business makes “continuous major investments in R&D”, with this sentiment being strongest amongst technology, healthcare, life sciences, manufacturing and IT/software firms. 

Respondents also acknowledged the wider spillover benefits of investing in R&D and innovation. They ranked five benefits in order of priority, with enhanced reputation and knowledge coming out on top.

Why pause for thought?

With large businesses embracing R&D so emphatically, the benefits of continuing to access R&D tax relief are clear. But the landscape has evolved considerably in the two decades since the incentive first launched. While the DSIT Guidelines – setting out the meaning of R&D for tax purposes – remain virtually the same, procedural rules have undergone wholesale revision, creating complexity for CFOs and others.

Applying for R&D tax relief requires a significant investment of time and greater forward planning than ever before, to ensure that more onerous claim preparation requirements such as the Additional Information Form (AIF) or rules on claim notification are met. This may require far greater stakeholder management, particularly when gathering project information. 

Alongside clearing additional procedural hurdles, businesses must consider the commercial arrangements through which the R&D was undertaken. New rules around subcontracted R&D seek to award relief to the R&D decision-maker and could see the right to claim shift up or down the supply chain.

The increased complexity, combined with a reducing benefit for some, is eroding the impact of a tool many large businesses have traditionally viewed as a significant value add.

Adopting the correct approach to R&D tax relief

Despite the greater complexity, our survey found that 81% of organisations do not have an agreed methodology in place with HMRC for claiming R&D tax relief under the new changes and that many do not expect their overall approach to change in the next 2-3 years. 

Our survey also indicated that while 14% of respondents have embedded systems and processes that enable them to capture R&D activity as it is identified (minimising the retrospective compliance work required), more than half examine the work they have done in past periods and then claim R&D tax relief for that activity.  

Yet with greater forward planning and the correct processes in place, there is much that large businesses can do to get on the front foot and proactively manage R&D claims. By adopting a contemporaneous rather than a retrospective approach, businesses can be more accurate with their record-keeping and efficient with their time.  

Three points to keep in mind

Ultimately, your approach to navigating the changes to R&D tax relief will be different depending on your size, sector and supply chain relationships. However, the following points are worth considering for all those looking to add value in this new environment.

1. Review your supply chains. It’s important to understand where R&D is taking place and who can claim for it under the new contracting rules. Ask yourself: “Was a third party used to undertake some or all of the R&D?” If so, “whose R&D is it?” and “who can claim the relief?” They’re complicated and highly technical questions, that have not only been subject to recent legislative change, but litigated in the Tax Tribunal. They typically require expert consideration by a specialist adviser. 
2. Consider your methodology and approach. In an increasingly complex landscape, companies shouldn’t be put off from claiming the relief, but should consider whether legacy methodologies need a refresh. Are you being proactive or reactive in gathering data? Is your claim built from the bottom-up or do you adopt a sampling methodology? Different approaches will suit different businesses, but you should be aware of the relative merits and risks of each.
3. Check your Patent Box position. An integrated strategy across the spectrum of innovation incentives helps businesses access funding at the right time, with the potential benefit of cashflow outside the tax return cycle. While businesses may be more familiar with R&D tax relief, there are other powerful incentives that also form part of the innovation toolkit. Patent Box, for example, is a generous but historically under-utilised incentive for companies with patented IP, which large firms should consider exploring.