R&D tax credits were first introduced in 2000 and, according to HMRC’s most recently published statistics, have provided £33.3bn in tax relief to UK companies, through 300,000 claims. Over that period, and particularly in the last six years, the number of annual claims has increased dramatically. To put this in context, of the 300,000 claims made in the past 20 years, 62,000 were made in the latest year of review.
Tax support of more than £33bn sounds impressive, but a recent report by the Centre for Business Research at Cambridge Judge Business School cast doubt on the success of the scheme and the government’s stated ambition for R&D spending to reach 2.4 per cent of GDP by 2027. The latest published figures put overall R&D spending at 1.7 per cent of GDP in 2018 – some way off the 2027 target. Instead, the report pointed towards Office for National Statistics data showing the impact of the tax credits on business investment in R&D has been ‘insignificant’.
So, are R&D tax credits a valuable incentive that both lowers the net cost of innovation in the UK and encourages businesses to develop intellectual property? Or are the credits a ‘nice to have’ that, whilst helpful, fail to drive investment decisions? As ever, the truth lies somewhere in between.
The benefit of R&D tax credits depends on the company’s size and financial security. Many growing SMEs view the R&D tax credit as essential to support the continued investment in innovation. Its attractiveness lies in the fact that it is a well-established scheme that is fairly simple to access.
For larger companies, it is more difficult to demonstrate that the RDEC (R&D Expenditure Credit) impacts investment decisions. Many businesses describe it as a ‘nice to have’, but with a net cash benefit of around 10 per cent, it isn’t enough in isolation to influence a multi-national’s decision to locate an R&D facility in the UK. Such decisions need to take into account local capital and employment incentives, and the wider tax system of a particular territory.
From our experience working directly with businesses of all sizes, R&D tax credits do have a real impact on businesses. However the regime could be better and key to this is simplifying the criteria and improving ease of access, whilst offering benefits that will drive investment decisions.
A comprehensive review of the regime appears to be exactly what the latest Government consultation, published in March 2021, seeks to do. We welcome this. The consultation is a root-and-branch review of the regime, looking at the structure and administration of the reliefs, the qualifying expenditures and the definition of R&D.
In considering ways to refresh the regime, big-impact changes could include:
- adopting a single scheme, following the principles of the RDEC, but with a tiered benefit according to a business’ size;
- moving away from the current EU definition of an SME that often precludes a business with private equity investment from claiming the higher rate of relief, and instead moving to a definition based on the consolidated corporate group; and
- refreshing and simplifying the current BEIS 2004 guidelines in which the definition of R&D is set out.
How quickly any changes will be made remains to be seen, but either way, it’s encouraging to see that in commissioning the review the government has listened to us and others. The concern is around what happens next, and how long it will take to bring meaningful change as a result.