R&D: What needs to happen to stimulate more investment?

Research & Development (R&D) is essential for economic growth, but business spending has reduced since 2020 according to ‘worrying’ ONS research.

R&D allows businesses to remain competitive and encourages innovation, particularly in the science and technology fields.

But new Office for National Statistics (ONS) analysis has indicated a ‘worrying’ reduction in business R&D spend since 2020. The National Centre for Universities and Businesses (NCUB) say the reduction equates to £80 million less being spent on R&D during 2021 and 2022 than in previous years.

Successive governments have implemented various policy changes to R&D tax relief schemes in an attempt to address concerns around rising fraud while also simplifying the claims process.

The R&D scheme for SMEs always worked differently to R&D schemes for large corporates but the two merged in April of this year.  

The two merged schemes, R&D expenditure credit (RDEC) and enhanced R&D intensive support (ERIS) replaced the old RDEC and SME schemes as of 1 April 2024.

Under the new system, the expenditure rules remain the same, but changes include:

• Introduction of above-the-line credit for SMEs as well as large corporates where previously this only applied to those claiming under RDEC.
• Inclusion of the PAYE and NI contributions cap as per previous the SME scheme, which is more generous than RDEC.
• Certain restrictions on overseas expenditure.

In January, AAT Comment spoke to accountants who warned that R&D relief scheme changes could put off the ‘wrong’ claimants and supress innovation.

We asked accountants if they’d want to see more R&D changes to help further incentivise investment and if so, what needs to happen to stimulate more innovation and investment.

R&D claims need to be scrutinised properly to reduce expensive HMRC enquiries

Rory Fothergill, R&D and Tax Advisory Senior Manager, JS

There have been numerous changes within the R&D schemes lately which have hit SME R&D claimant companies hardest. The rate of R&D tax relief enhancement has reduced from 130% to 86% for many SMEs. And for accounting periods commencing 1 April 2024, companies will need to claim R&D relief under an even less generous ‘Merged Scheme’ that reduces R&D tax relief even further.

Recent changes mean there are currently six different R&D regimes which makes navigating the nuances of R&D tax relief more complex and less attractive for start-ups.

There’s also been a significant increase in HMRC enquiries into R&D claims. These are disproportionately affecting SME businesses, which do not have the resources to invest time and money dealing with the huge amount of information HMRC requests.

I’d like to see:

An approved R&D advisor list, to offer more assurance that claims submitted from those advisors will have been scrutinised and properly prepared. This should reduce the amount of time-consuming and expensive HMRC enquiries.

More grant funding for companies undertaking innovative R&D work.

Smallest companies receiving means-tested subsidies to assist with engaging professional support to help with R&D claims. Most start-ups don’t have in-house expertise to deal with complexities or reporting requirements of increasingly complex R&D schemes, so they’re at a disadvantage otherwise.

The rate of R&D tax relief for qualifying SMEs increased. The costs of claiming have increased significantly when factoring in the reduction in SME R&D relief, increased HMRC reporting requirements and the risk of HMRC enquiries.

Less aggressive approach from HMRC when conducting R&D enquiries. The trust needs to be rebuilt in this area to encourage genuinely qualifying R&D companies to claim the relief they are entitled to.

Verdict: We need an HMRC-approved R&D advisor list, more grant funding and means-tested subsidies for small companies to limit the impact of HMRC investigations for small business.

We need to address the skills shortage, encourage greater overseas collaboration and lower the risk associated with R&D

Clare Bowen, Partner, Monahans 

There is no ‘one size fits all’ approach when it comes to R&D. There need to be different initiatives put in place to make it more attractive to businesses. This will include tax relief but by no means be restricted to it.

I’d like to see:

Skills shortage addressed. R&D can’t happen without the right team of people and many industries are struggling to find highly skilled people. There’s also a shortage of job opportunities for professionals at lower levels.

More collaboration between countries to fill skills gaps. The collaboration element of R&D is important and needs greater focus. A company may need a specific machine they cannot build themselves, so they need to be able to tap into the expertise of overseas businesses.

Re-define R&D rules to ensure businesses who are genuinely investing in R&D are rewarded, maybe by enhanced tax relief.

Simplify and streamline the claims process. Some smaller businesses I work with are entitled to R&D tax relief but the claims process is so complicated that they don’t bother at all.

Set up a governing body or institute to screen businesses and filter out those that don’t match the R&D criteria required.

Compensate businesses that suffer significant loss or failure relating to R&D, to reduce business concern around associated risk.

Implement a grant system or 50:50 match as an incentive to businesses that can provide a solid business plan. The tax relief is great as you get rewarded after investing, but extra support that can be given prior will encourage more investment in R&D.

Verdict:  We need to address the skills shortage, encourage greater overseas collaboration and lower risk associated with R&D investment.

Impact of relief is more significant among start-ups than big PLCs

Stephen Gibbens, Director, Accountech

Changes to R&D tax credits have generally been beneficial. They’re helping to reduce fraud and eliminating rogue advisors who were making claims for care homes etc.

The R&D-intensive company change ensures that the relief is better targeted too, but does mean we are effectively still left with two different schemes.

The focus now needs to be on increasing the quality of claims without changing the rules further. In particular, we need to ensure the relief is properly targeted and goes to our most innovative tech startups. We mustn’t tip the balance away from tech start-ups to big PLCs.

The government may get more R&D for its money from larger companies, but the impact of the relief is much more important for tech start-ups, which have fewer resources.

HMRC also needs to be better resourced to process claims quicker and more reliably and allow scope for better dialogue with advisors on claims.

We also have to avoid past errors where claims have been paid out but only properly checked later. The uncertainty created by that can have a huge negative effect on the motivation to undertake R&D in the UK.

Verdict: We need to tip the balance in favour of tech start-ups as they have fewer resources than larger PLCs.

R&D claims are still too complex and need simplifying

Paul Beare, Founder and MD of Paul Beare Limited

Previously, the process of applying for R&D tax credits was carried out by accountants on behalf of their clients. However over the years the criteria have become more complex. With record numbers of claims being refused by HMRC, most accountants now see this as a specialist area that requires specialist skills.

With this in mind, most accountants are unlikely to discuss potential R&D claims with their clients as it’s not an area they offer within their services.

The past year has seen a delay in processing of claims with HMRC, which will have negatively affected cash flow for claimants. That’s not encouraging continued investment in the area.

In terms of stimulating more innovation and investment, it would help to promote R&D credits to the business potentially making the investment. They could look to simplify the claims process allowing accountants to make it a core activity in their offering. Anything that would speed up the claims process would be very welcome.

Verdict: The R&D claims process is still too complex and needs simplifying. Accountants could then make it a core activity in their offering.

Would you like to contribute to future articles like this one? If so, please get in touch with Annie Makoff-Clark at [email protected].

Annie Makoff is a freelance journalist and editor.