AAT helps the House of Lords to improve R&D tax credits

The country needs to do much more R&D, and tax credits could make it happen – if they are fixed.

One constant, however, has been the broad agreement that government must play an active role in supporting R&D investment. As the FT recently pointed out, “The aspiration to boost research and development spending to 2.4 per cent of GDP by 2027 has been a rare element of consistency in UK policy in recent years.”

UK underspends on R&D

However, in reality, only 1.7% of UK GDP goes on R&D, a figure well sort of European and OECD averages. In fact, the Institute for Public Policy Research recently pointed out that the target would need to be revised upward to around 3.5% to simply reach parity with Sweden and the US – never mind the 5% currently being spent in South Korea.

That was the backdrop of a recent hearing of the House of Lords Finance Bill Sub-Committee, which aimed to examine how effective the R&D Tax Credit system has been in incentivising firms of all sizes to invest more in research and development.

AAT’s view on R&D tax credits

R&D tax credits are a well-established part of the tax relief landscape. When we last consulted on the issue in 2020, we were firm in our belief that investment levels as a whole fell short; we also noted that even the Government’s targets weren’t ambitious enough and that as a country we should not only be doing more but also demanding more ‘bang for our buck’

Despite claims that the UK is serious about its support for new and innovative businesses, we share the widespread concern over the amount of tax relief paid out under the regime and the verified impact on the real economy. Jenny Tragner at Forrest Brown, one of the more astute observers of this, summed this up in the FT recently when she asked, “If we have been doing all that R&D all along, then where are the results of that?”

Despite some success, the system has been the target of persistent criticism from a variety of quarters. The critics tend to focus on two main issues: the levels of abuse via erroneous or fraudulent claims; and the lack of awareness of the reliefs available – a problem particularly prevalent among small firms that are seen as most in need of support.

How to fix R&D tax credits

All of this has, understandably, led to calls for reform, something the committee was keen to explore. Our position is clear: we believe that as currently constituted, R&D tax credits have the potential to deliver a lot of benefits to the UK economy. However, there are some areas in need of attention.

Clarify compliance processes

On the issue of abuse, there are a series of measures that are designed to address spurious claims and improve compliance, and we would say that while these measures may well improve the effectiveness of HMRC’s compliance activities, there needs to be greater clarity as to how specifically each of the measures will reduce erroneous claims.

That is driven by our firm belief that real improvements in the ways R&D tax credits are administered and utilised by end users will depend heavily on the accountancy profession. As we have stated before, the issue of unregulated tax advisers remains a concern here. According to HMRC’s own figures, around two-thirds of the instances of non-compliance, errors and erroneous claims are down to the one-third of the tax agents that are not regulated.

Tackle unregulated advisors

As we have consistently stated, employing the services of regulated agents will ensure that small businesses will access the advice that they need, be made aware of what is available to them by way of reliefs and ultimately access what they are eligible for.

To that end, HMRC must take seriously the need to improve the levels of understanding around this issue. Some of the guidance remains muddled and in some cases woefully out of date. At present the guidance available is either too complex or not detailed enough. An overhaul of the support information would be helpful – and overdue.

Conclusion

There are encouraging signs: the move towards a digital platform for handling R&D tax credits has already begun. The ‘no-win-no-fee model, where advisers offer to shepherd claims through in return for a slice of the return generated, is also helping extend the reach of tax relief to firms that might not otherwise think to claim (although vigilance is needed to ensure less scrupulous advisers do not exploit it).

Ultimately our economic future success lies in harnessing the talent and innovative spirit that has long been a feature of the UK economic landscape. There are positives, but more work needs to be done.

Adam Harper is AAT's Director of Professional Standards & Policy..