Will the consultation on R&D tax incentives go far enough?

Innovation is crucial for long term economic growth. The government has an ambitious target to raise investment in research and development to 2.4 per cent of UK GDP by 2027. R&D tax reliefs for UK businesses play a fundamental role in achieving this. The government is committed to creating an internationally competitive tax system, and ensuring strong, sustainable growth in a rapidly changing economic environment. 

Businesses view R&D tax relief schemes as a valuable incentive to innovation, while cash flow support during the R&D phase means the tax credit-based approach is generally favoured by both large and small companies. There is broad industry acceptance of differential rates between larger and smaller companies. However evidence suggests the support provided by the R&D Expenditure Credit (RDEC) is not enough to change behaviour on its own. The RDEC is just one of a range of incentives and broader strategic factors that companies consider when determining their technology and investment roadmap.

Any proposed changes to the current status quo need to be carefully considered and ensure that the mechanism for claiming R&D tax reliefs is straightforward, targeted and reflective of the claimant company’s size. Creating a single scheme, following the RDEC structure but with differential or tiered rates according to the size of the company, could improve the effectiveness of the reliefs. 

Most R&D tax relief claims are compliant and non-abusive so, to avoid disincentivising claimants, the effort and burden required to produce supporting documentation should not be disproportionate to the benefits available. Nevertheless, HMRC has an important role to play in weeding out fraudsters, so it must have sufficient resources to assess claims using a risk-based approach, to ensure abusive or incorrect claims are not successful. 

RSM believes that a broader range of types of expenditure incurred by companies qualify for R&D tax relief, to help them make long-term commitments to the UK economy and provide employment opportunities through partnering and subcontracting across a range of businesses. In particular, clients have indicated that including capital spend within the R&D tax relief regime would influence their investment decisions.

Aligning R&D incentives with wider government targets and objectives could provide a further boost to important industries and support the government’s industrial and societal strategies, while not detracting from broader innovative investment across other sectors.

The current schemes of R&D tax relief are seen by UK businesses of all sizes as providing a valuable incentive to conduct innovative work. We do not believe that there is anything fundamentally ‘broken’ in the current schemes and the suggestions made in our response to this consultation aim to ensure that the reliefs, which are currently working well, can work even better.