Budget 2021: Government consults on reform of R&D Tax Reliefs

By 2027, the government wants to increase overall expenditure in research and development to 2.4 percent of UK GDP. R&D Tax Reliefs play an important role in encouraging this investment by lowering the costs of innovation. As a result, it's critical to keep the reliefs current, competitive, and well-targeted.

Combined, the latest Treasury figures show that these reliefs provided £5.1bn of support to nearly 60,000 businesses in 2017-18.

The government announced a review of the reliefs in Budget 2021, accompanied by a stakeholder consultation. This consultation will look at the essence of private-sector R&D investment in the UK, how R&D Relief schemes help or influence it, and where improvements may be needed.

The existing R&D tax relief schemes are the subject of this wide-ranging consultation, which seeks input from stakeholders.

The following are the two key tax reliefs applicable to companies doing R&D in the UK:

• Research and Development Expenditure Credit (RDEC): an ’above the line’ credit equal to 13% of qualifying R&D costs; and

• Research and Development tax relief for small and medium enterprises (SME scheme): an additional deduction of 130% of qualifying costs from an SME’s profits on top of the normal 100% deduction, and, if lossmaking, a tax credit worth 14.5% of the surrenderable element of that loss.

To qualify for relief, expenditure on R&D must be incurred on particular types of activity, currently limited to staffing costs (employees and agency workers), consumable or transformable materials (such as water, fuel and power of any kind), certain types of software, payments to clinical trials volunteers and, depending on the relief, some subcontracting costs.

This consultation will cover how the two R&D relief schemes support R&D in the UK, including how they operate, how they interact with the way modern R&D is done, and the main differences in design between them.

It will also consider whether the schemes should be amended to remain internationally competitive and keep the UK at the cutting edge of innovation.

On a more fundamental issue it will also review whether the definition of R&D and the scope of what qualifies for relief remain fit for purpose, and whether current rates of relief, and the difference in rates between RDEC and the SME scheme, remain appropriate.

One of the key issues to consider is whether it makes sense to have two separate R&D tax relief systems and asks stakeholders for feedback on the current position and whether a merger of the two schemes would be workable.

The consultation document stated: ‘Having two schemes also means having two, overlapping sets of rules instead of a single coherent system. The 2017 Budget promised to simplify the R&D claim process, and stakeholders have suggested that “RDEC for all”, potentially with a higher rate for SMEs, could be one such simplification.’

Jenny Tragner, director at R&D tax credit consultancy ForrestBrown, said: ‘For too long, the R&D tax credit system has been faced with increasing complexity and we have long called for a proper review in place of the previous piecemeal changes which drive complexity and uncertainty.

‘The review will consider a much needed modernisation of the definition of R&D and qualifying expenditure categories, as well as seeking practical recommendations on dealing with the problem of spurious advisers. This is something which needs to be tackled urgently – and is something we’ve called for repeatedly. Administration of the incentives could also be vastly improved to provide more certainty for businesses, and we would urge HMRC and advisers to work together more effectively to improve the quality of external advice available to companies.’ 

As well as reviewing the rules of the reliefs this consultation is also seeking views on ways in which the claims process might be improved, both to give a better experience for claimant companies and to improve controls, reducing the risk of abuse and focussing the reliefs on genuine R&D.

The general consensus is that HMRC has been experiencing some issues with compliance due to the complexity of the rules and any improvements to the current claims process would improve the overall effectiveness of the schemes.

There are also concerns that some companies have been set up purely to advise on R&D claims, with criticisms that ‘some of these agents have developed a no-win, no-fee business model which presents a risk of boundary-pushing. HMRC is not always aware of who these agents are, or of their experience with R&D claims, and there have been instances of agents persuading companies to submit marginal claims or even to claim for activity which is not R&D,’ the consultation stated.