When Chancellor Rishi Sunak unveiled a wide-ranging consultation on the future of R&D tax relief, we welcomed the announcement as a timely and potentially transformative intervention.
As we now enter this vital post-pandemic recovery phase, we are even more excited about what this consultation could mean for our industry, the economy, and UK businesses.
In this article, we outline our key responses to the government R&D tax reliefs consultation and why it matters to you. Some suggestions are small, others are substantial.
What is the R&D tax reliefs consultation?
Rishi Sunak announced a broad consultation on private-sector R&D investment in the UK in his Budget 2021 address. The R&D tax reliefs consultation explores how this investment is supported or otherwise affected by the R&D tax relief incentives, and where changes may be appropriate.
Why is the R&D tax relief consultation happening?
- Over the past few years, HM Treasury has raised concerns about whether the current incentive is well-targeted.
- HMRC has raised concerns about errors and fraud in R&D tax claim submissions. In its 2019-20 annual report, it estimated that errors and fraud could be costing taxpayers around £311m annually.
- There is a lack of cohesive purpose and strategy for R&D tax relief across key government bodies: HMRC, HM Treasury, the Department for Business, Energy and Industrial Strategy (BEIS), and UK Research and Innovation (UKRI).
- There are enduring operational challenges and vulnerabilities within the current system of R&D tax relief.
Our vision for R&D tax relief
ForrestBrown wants businesses to access the incentive with clarity and certainty. If a business chooses to engage a specialist R&D tax adviser, then it should know that the agent is held to the highest standards of ethical conduct.
R&D tax relief can help put British businesses on the front foot. It should help them overcome the longer-term impacts of the COVID-19 pandemic and Brexit, as well as other major challenges like climate change. Our vision is not just for a quick recovery – but for dynamic, bold growth far into the future. R&D tax relief can make this vision a reality.
We want the government to seize this chance to create a coherent, long term platform for R&D tax relief, with greater flexibility to adapt as priorities change. Through more effective and precise targeting of the relief, we can provide greater certainty to businesses, attract more investment and secure our global competitiveness.
How we’d get there
What follows are the key recommendations included in ForrestBrown’s R&D tax reliefs consultation response. We’ve grouped these by category and condensed them for clarity and readability.
A better, more modern definition of R&D:
- A future incentive would benefit from a clear statement of intent from the government on the purpose and focus of R&D tax reliefs. This statement should include target sectors, examples of commercial R&D projects, and what measures of success will be applied in reviewing the incentive.
- This statement of intent would provide a foundation for a modernised definition of R&D, which is more accessible for businesses. Businesses across a diverse range of sectors access the incentive, but there is little formal guidance on the application of the definition of R&D to different sectors.
Clear regulation of the incentive:
- An obvious step would be to regulate the professional tax advice market. Firms that market and charge for tax advice, including R&D claim preparation services, should be subject to mandatory membership of a relevant professional body.
- HMRC must take some responsibility for addressing the poor behaviour of professional agents. A formal process for a company to authorise an R&D agent to deal with HMRC on its behalf would provide visibility and enable HMRC to target compliance resources at the poor behaviour of some agents.
- Some errors come about due to the complexity of the R&D tax legislation itself. This consultation offers the opportunity to define a simpler rule base, recognising that the desire for simplicity in tax must always be balanced with the need to protect against abuse.
Streamline the rules:
- 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. It also recognises the advantages of the (more recently designed) RDEC model, which apply just as validly to SMEs.
- There is currently a material uncertainty regarding the treatment of contracted out R&D and subsidised R&D expenditure. It should be clear to businesses where ownership of R&D lies so that relief can be targeted at the right businesses where it can influence behaviours and drive investment decisions.
- Next in scope should be to refine the types of expenditure that attract relief, including:
- Modernising the software costs category to accurately reflect how data and hosting costs contribute to modern R&D processes.
- Enhancing capital allowances for R&D investments.
- Removing or limiting marginal expenditure, such as reimbursed business expenses and qualifying indirect activities.
- Consulting on other direct R&D expenditure.
In the long term, these changes would let the government target additional relief to projects of particular value. Those with wider climate or social benefits, for example. Also, to adjust these measures in future more dynamically without requiring major legislative changes.
ForrestBrown – powering your future
ForrestBrown is the UK’s leading specialist R&D tax consultancy. Formed in 2013 and a member of the Chartered Institute of Taxation (CIOT) since inception, professional standards have always been at the heart of our culture.
Our ambition is to help create an R&D tax relief incentive that’s fit for the future. The current system has worked well for over two decades – but now requires a substantial update. If we’re serious about innovation and progress in the UK, then our suggestions are a good place to begin.
ForrestBrown is passionate about this incentive and how it could transform your business’s growth journey. That’s why we are leading these efforts to create simplicity, certainty, and value for genuinely innovative UK businesses.
We always want to hear from businesses and their advisers. Contact Jenny Tragner CA ATT today via email if you’d like to discuss any part of our consultation response: firstname.lastname@example.org.
Read more of our previous R&D tax credit consultation responses.