R&D relief scheme “must be updated” to minimise uncertainty, industry argues

R&D relief scheme “must be updated” to minimise uncertainty, industry argues

Sources say that while the regime is positive, it must reflect the “reality of the 2020s”

The UK’s Research & Development (R&D) tax relief regime for businesses must be refined and modernised to mitigate risk and uncertainty, industry participants say.

Under the current regime, SMEs can claim up to 33p for every £1 spent on “qualifying” R&D activities – the rate is 11p for large companies.

The UK government is currently working towards a 10-year plan to raise investment in R&D to 2.4 percent of GDP. Following the announcement of this target, a three-month consultation reviewing the scheme was launched by HM Treasury in March 2021.

“The definition of R&D should be updated to better reflect the commercial reality of the 2020s,” said the Institute for Chartered Accountants in England and Wales (ICAEW) in its official response to the consultation.

The response notes that the definition of R&D is “now over 20 years old”, and that the regime could benefit from being aligned with HMRC’s Making Tax Digital (MTD) plans.

“Since 2000 there has been an explosion of internet-based technologies and industries, as well as many other technological and commercial developments. A thorough review of the definition would allow HMRC to focus the relief on the kind of R&D activities that are now prevalent and that it wishes to incentivise in the 2020s.”

The regime “must be brought up to date for a digital world”, the ICAEW added.

Also included in the ICAEW’s response is the suggestion that R&D reliefs could be incorporated into the UK’s grant subsidies system – a scheme offering tax breaks to businesses to offset operating costs.

“Companies can then more easily determine all the incentives they have received in respect of individual projects,” the ICAEW said in its response.

However, the idea is rejected by Jenny Tragner, technical director at R&D consultancy Forrest Brown, who argues that this approach may complicate things further.

“We don’t agree that R&D should be integrated into the grant funding system, as the two systems work in fundamentally different ways,” she says.

“There are benefits to having both a grants system, which targets specific projects through competitions, and a tax relief system, which allows those who don’t win these competitions to still seek government funding. Now the UK has left the EU, the process of redesigning state aid rules has begun, giving the government an opportunity to simplify things.”

Tragner also challenges the ICAEW’s suggestion that the schemes could be adapted “to provide financial support closer to the time of expenditure”, rather than after the tax return is submitted. The ICAEW argues that this would, in theory, “provide support closer to spend” and enable greater stability for businesses.

“The ICAEW’s notion of companies receiving tax relief before filing their tax returns is a nice one in theory, and it may be feasible in the future with the introduction of Making Tax Digital. However, it would need to be balanced with the need to protect the incentive against abuse and added complexity, and the consideration that it would substantially increase the resource requirement on an already-stretched HMRC,” says Tragner.

“We think that R&D tax relief should be kept within the self-assessment system, as it works in harmony with the direct funding through the grants system. It’s also a simple, established system with clear compliance processes to protect against abuse.”

Despite this, Tragner is largely in alignment with the ICAEW’s view on updating the definition of R&D, concurring that this would take the regime “a step further” and help to “minimise uncertainty among businesses”.

“We recommend beginning with a clear statement of intent, which not only details target sectors for R&D tax relief, but also includes modernised examples and guidance that help businesses to better understand the incentive and ensure that relief is targeted at genuine R&D.”

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