UK’s Plan to Boost Innovation: The Future of R&D Tax Relief

The UK government has made no secret of its ambition to make the country a global epicentre for innovation. One of the key tools in its arsenal is research and development (R&D) tax relief. But recent changes to this policy have raised eyebrows and concerns among the business community. With the government set to make pivotal decisions soon, Bloomberg Tax looks at what these changes mean for businesses.

A Year of Changes: The R&D Tax Relief Jigsaw

Over the past year, the government has made several tweaks to its R&D tax relief policies. For businesses, this has meant delays, added complexity, and lingering uncertainty about how best to navigate these incentives. These aren’t just policy jargon. They directly impact budgets and investment plans for numerous companies aiming to pioneer the next big thing.

Come November, the government’s Autumn Statement will shed more light on where R&D tax incentives are headed. But if recent events are any indication, more changes are on the horizon, potentially impacting business budgets by next year.

Unified Scheme: Bridging the Gap between SMEs and Big Corporates

Historically, there were two main R&D tax relief schemes:

  1. One for small and medium-sized enterprises (SMEs).
  2. The Research and Development Expenditure Credit (RDEC) for larger companies.

The rationale was simple. Financing R&D is typically more expensive for smaller businesses, so they were offered more generous tax relief rates. But last autumn, the government decided to shake things up by increasing RDEC rates and subsequently aligning SME rates.

The most significant change on the horizon? The government is considering merging these two schemes. They’ve already provided a sneak peek of what this could look like via draft legislation. While a final decision is pending and will coincide with the Autumn Statement, this merged scheme could be up and running as soon as April 2024.

The R&D Supply Chain Puzzle

Merging the schemes isn’t as straightforward as it might sound. There’s a complex web of rules determining which company in a supply chain can claim R&D relief and under what scheme. The aim is to ensure the relief encourages more R&D investment and doesn’t just become a box-ticking exercise.

The main challenge is distinguishing between contracted-out R&D and R&D done while providing regular goods and services. HM Revenue & Customs (HMRC) recently adopted a wide-reaching view on what falls under contracted-out R&D, causing disputes and uncertainties, especially for SMEs.

The merging of the schemes must address this ambiguity. If not, the uncertainty plaguing SMEs could expand to all businesses, risking the very aim of the incentive.

Defining ‘R&D-Intensive’ SMEs

The merging proposal has a twist. While a single scheme was proposed for all R&D expenses, the government might still retain the current SME R&D tax relief for companies termed as “R&D intensive”. These are SMEs that have a significant portion of their expenses devoted to R&D.

The challenge? The current criteria – where 40% of total expenses must be R&D-related – is quite steep. This means even businesses heavily invested in R&D projects might miss out.

Given the government’s aim to support innovation, they’ll need to take a more inclusive view when defining what “R&D-intensive” truly means.

The Road Ahead: Time is of the Essence

The unified R&D tax relief scheme is undeniably a move towards simplification. But with a potential rollout as soon as April 2024, businesses might find themselves racing against time to adjust their plans.

Innovation is at the heart of economic progress. As the government pushes to establish the UK as a science superpower, businesses eagerly await clear, thoughtful policies that support their innovative efforts.