Anyone watching Rachel Reeves deliver her inaugural Autumn Budget last month could hardly have failed to notice her focus on “growth”. Mentioned a whopping 367 times in the 76-minute speech, it was hardwired into her narrative on rebuilding Britain through a national “growth mission”.
Also featuring prominently as one of the seven pillars of that growth mission was innovation, with key schemes such as the Life Sciences Innovative Manufacturing Fund and Industrial Energy Transformation Fund receiving new funding commitments of £520 million and £163 million respectively.
The emphasis on innovation and growth is, of course, welcome, as is the government’s ongoing commitment to R&D tax relief. But the positive headlines mask the fact that by maintaining the relief at the existing rate, SMEs now find themselves locked into the lower rate brought in under the merged scheme in April 2023.
As a result, it’s little surprise that R&D-focused SMEs might question whether claiming remains worthwhile, particularly given the changing compliance and legislative landscape. SMEs face an increased risk of enquiry owing to more rigorous compliance activity by HMRC, while wholesale revision of the governing legislation has significantly increased claim complexity and preparation time.
Recent negative press – covering the allegedly fraudulent activities of a minority of bad actors within the industry – has compounded the issue and highlighted the risk of getting claims wrong.
What fuelled the negativity?
Unscrupulous agents
Concerns relating to fraud in R&D tax relief started in around 2020 with the Convergica case, which involved a fraudulent claim for £29.5 million. In response, government scrutiny turned to the sector and a series of consultations – all aimed at raising its standards – was launched.
Still the negative headlines persisted and, in October 2022, The Times ran an article highlighting abuse of the system. This was followed in December 2023 by the summoning of Jim Harra, First Permanent Secretary and Chief Executive of HMRC to the Parliamentary Public Accounts Committee for questioning in relation to dubious market practice by unscrupulous agents and its response.
More recently, following an expose of an allegedly fraudulent adviser by investigative journalist, Dan Neidle, a fresh wave of negative media coverage was sparked, painting a gloomy picture of the incentive.
Compliance landscape
Against the backdrop of negative reporting, fraudulent claims are falling – in part owing to HMRC’s increased compliance activity, which has seen the number of claims checked rise from 1% to around 20%. HMRC’s latest statistics indicate that error and fraud amongst SMEs will be around 14.6% in 2023/24, down from 25.8% in 2021/22. Of this percentage, the vast majority will reflect error, rather than a deliberate intent to defraud the system.
Going forward, HMRC’s increased compliance activity will continue to impact, as will legislative changes to the incentive brought in to drive up industry standards. These include notification and the Additional Information Form – both of which require greater forward planning and information gathering.
On a practical level, HMRC’s increased compliance efforts mean that SMEs face a more challenging compliance environment, which they might not have the time or resources to support. They may find themselves questioning the value add from the relief and wonder whether the spillover benefits, such as enhanced reputation or the ability to retain and attract skilled staff will ever materialise. It may even force some to abandon a claim mid-way through.
But challenges aside, R&D tax relief remains a vital incentive for SMEs, which shouldn’t be put off claiming. Where businesses are undertaking qualifying R&D, investing the time to claim the relief to which they’re entitled, could make a material impact on their business and yield significant benefits.
Reasons why SMEs shouldn’t be deterred
In a fiscally conscious budget, many commentators suggested that R&D was going to be first in the firing line. But it wasn’t, proving that in even more challenging times, R&D tax relief remains a vital tool for driving innovation and productivity.
Business growth and productivity needs to be delivered by business, so deploying a bottom-up approach and equipping SMEs with the tools to do this is key. And, regardless of how it is reinvested – be it employing extra staff or investing in further R&D – there will always be a spillover benefit for the wider economy. Employment might rise, or another UK business may feel the benefit of a materials order.
As one of our R&D-intensive small business clients said to us recently: “R&D tax relief means everything can happen faster and, ultimately, means we can generate more revenue and contribute to UK plc.”
It’s a sentiment that’s reinforced in other countries too. According to a recent OECD report, 33 out of 38 OECD countries offered tax relief for R&D expenditures in 2023, up from 19 in 2000.
With the right advice, the relief remains worthwhile
There’s no doubt that the compliance environment for R&D tax relief has become more rigorous in recent times. But this doesn’t mean that SMEs should be deterred from claiming. As with most things in life, R&D tax relief has evolved and matured. It now sits within a more complex framework, but that framework is robust, offers stability and will deter those seeking to exploit it.
The impact of unscrupulous advisers dropping out of the marketplace is already proving to be positive – as recent statistics indicating a reduction in error and fraud indicate. It will raise standards in a specialist and highly technical area of practice, allowing reputable agents such as ForrestBrown, with its multidisciplinary team of experts, to assess and prepare claims with rigour.
While the rates available to SMEs might have declined from their pre-April 2023 peak, they remain a key part of the innovation toolkit. Partnering with a specialist innovation incentives adviser such as ForrestBrown, can help to unlock their potential and help you navigate the innovation incentive landscape.
Need help with claim preparation?
If you’re an innovative SME, don’t be put off exploring R&D tax relief. The landscape may have become more challenging and the rates less generous, but R&D tax relief is still worthwhile with the right advice.