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House of Lords turns focus on R&D tax relief reforms

Director & Head of Policy
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Select committees provide an important role scrutinising government policy so it was a privilege to be invited to give evidence to members of the House of Lords running the rule over proposed reforms to R&D tax relief.

The Finance Bill Sub-Committee of the Lords’ Economic Affairs Committee has been holding an inquiry into draft legislation published on ‘L-day’ earlier this year. Following a call for written submissions, the Sub-Committee has been hearing oral evidence from witnesses representing professional bodies for the tax and accountancy profession as well as business organisations such as the CBI.

This week it was the turn of specialist tax advisers, and I was pleased to be invited to share learnings from ForrestBrown’s experience at the forefront of the field for almost a decade, as well as my own experience over the past 20 years.  Appearing in front of the Sub-Committee was a good opportunity to promote the positive benefits of the incentive, along with recommendations to enhance its effectiveness.

As part of its consideration of the Draft Finance Bill, the Sub-Committee is looking at aspects of the proposed legislation aimed at incentivising business investment, extending the scope of qualifying expenditure and increasing R&D activity in the UK. Members are seeking to explore how the proposed changes will impact companies claiming R&D relief – something we have been discussing with many of our clients since the beginning of the consultation on reforming the incentive in March 2021.

What struck me watching earlier witness sessions was the level of interest and expertise amongst peers on what is a specialist area of tax. The Sub-Committee clearly wanted to better understand how the incentive currently functions to inform how it might be improved to benefit UK R&D. Questions were well informed, but there were certainly no softballs, and any perceived inconsistencies were forensically examined in follow ups.

Against this backdrop, I was prepared to be challenged – and I wasn’t disappointed. Peers probed whether the incentive provided value for money, if more could be done to tackle abuse, and the role of advisers in helping businesses access relief. In response, I pointed to the potential disconnect between the positive intent of R&D tax relief policy and its implementation by HMRC, acknowledging the need to reduce error and fraud while cautioning that the solution to each may be different and actions need to be well targeted to protect genuine R&D.

There was much discussion about whether the definition of R&D was fit for purpose. At ForrestBrown we have been calling for a modernised definition for some time as the current wording has not been updated since 2004. The potential impact of limits to relief for R&D activity undertaken overseas was also examined. This is something we believe could have unintended consequences for the UK economy. And there was welcome recognition that the promised ‘root and branch’ review of R&D tax relief promised when the government launched consultation in 2021 has not yet been delivered.

In the week of the Autumn Statement, the Finance Bill Sub-Committee’s inquiry felt like a timely reminder of the benefits of the incentive. Witnesses in the previous session, including representatives from TechUK and the bioindustry, made clear their members place great value on R&D tax reliefs. While the shortcomings of the current system should not be overlooked, it is important that the Chancellor follows the Lords’ lead and keeps this bigger picture in mind.

Further changes since the Autumn Statement are outlined in our R&D tax relief changes article.