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HMRC must incentivise business R&D spending

Reform of the overly complex research and development (R&D) tax credits system is long overdue and would release funding for innovation, argue Daniel Kyle, James Rolfe and Steven Smith, senior tax consultants at Leyton UK

For over 15 years the UK has suffered from productivity stagnation, and since the Brexit referendum, low business investment. Despite calls for ‘global Britain’ to lead on the international stage as an innovative, knowledge intensive, and technologically advanced economy, one major piece of the puzzle is missing. For decades, research and development (R&D) spending in the UK has been far too low.

Remarkably, there has not been a year since the early 1980s where the country has spent 2% or more of GDP on R&D. Last year, it was only 1.7%. The UK’s current levels of R&D spending fall significantly behind our counterparts – Germany spends 3.1% of GDP on R&D, and the US, 2.8%.

In light of these figures, the government has pledged to boost the level of R&D spending to 2.7% of GDP a year. The big question at the Treasury and Cabinet Office is how exactly this is to be achieved. There is one important lever the government can pull which will significantly raise the amount of R&D spending: a transformation of the R&D tax credit system to truly encourage and incentivise all businesses, regardless of their size or location, to invest back into their businesses.

In the budget this year, the Chancellor launched a far-reaching consultation into the UK’s R&D tax credit scheme. This represents a significant opportunity for the scheme to be transformed.

Since the introduction of the scheme in 2000 for SMEs, and separately for large companies in 2002, the R&D tax credit system has been deemed by many as a success. However, while many companies across the country have saved thousands of pounds a year through the scheme, the reality is that far too few businesses are claiming. Why? The scheme is too complex, and many are unaware of it.

Creating a united scheme

One key step to transforming the system is consolidating the SME and large company R&D tax credit schemes into one united scheme, with the mechanisms of R&D expenditure credit (RDEC) but with different rates for SMEs and large companies. A consolidated scheme would be significantly easier for businesses to understand and administer.

For smaller companies, this united scheme would provide certainty on their rate of return regardless of their profit or loss position each year, allowing for greater certainty in respect to budgeting and planning for the future.

Currently companies that have historically been loss making prior to submission of a claim may not see a cash injection for a number of years, curtailing further investment into R&D activities.

Accessibility to credits and the speed of processing is paramount to the success of the tax credit system. Speaking to businesses across the country, it is clear that there is significant appetite to access R&D reliefs in real time.

A quarterly return system, similar to that used for VAT and quarterly instalment payment (QIP) purposes, would accelerate the point at which claimant companies were able to access innovation funding which would in turn accelerate their reinvestment in innovation.

Tweaking the system so that relief for R&D spend is given quarterly via a reduction in payroll liabilities, similar to a process already in place in Belgium, the Netherlands and the US, rather than the current method against corporation tax liabilities, would again accelerate the point at which claimant companies were benefitting from their R&D activity.

This quarterly return scheme could be introduced as an ‘opt in’ scheme running in parallel with the current submissions via the corporation tax return. This would cater for both first time claimants making retrospective claims and companies not yet geared up to adopt the requirements of a quarterly scheme.

Advanced assurance scheme

We strongly recommend that the government introduces a revamped advanced assurance scheme whereby companies capture and submit R&D costs and activities on an on-going basis while having the assurance that these activities and associated costs would be accepted by HMRC.

Generally, companies appreciate and accept that more information and assurance would be required by HMRC in the future to facilitate such a system. Companies are happy to accept this additional scrutiny if it means accessing relief earlier and reducing risk. This would have a positive effect on the strength of R&D records kept by claimant companies.

The final step in making the system more transparent and assessible is a transformation in online submission and tracking tools.  The government’s digital tools must be sufficiently equipped to capture the necessary data required for any revamped scheme – with more real time information up front.

Such a move would allow the system to become truly digital, in line with the government’s implementation of Making Tax Digital. Ultimately modernisation of the system will provide better and more accurate R&D data, and hence better substantiated R&D claims being made. In turn we would like to think this would see a reduction in the number of HMRC enquiries in the long run.

There needs to be better transparency, openness, and collaboration between HMRC, agents and claimant companies. In essence all three parties have the same goal, which is to encourage and reward companies in the UK to undertake R&D activity.

Trust factor

A key factor in achieving this is creating the ‘trust factor’. There has been bad press in recent times in regards to some R&D boutiques, which has soured both HMRC’s and claimant companies trust with regards to R&D advisers and the R&D scheme itself.

One way to repair this relationship and to raise the overall robustness and accuracy of R&D claims is to introduce the idea of accredited R&D advisers overseen and administered either by HMRC itself or an appropriate professional body.

Through concrete steps to make the scheme more accessible and unified, the scheme can transform the UK into an innovation powerhouse.

 

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