A review of R&D tax credits

In Spring 2022 the UK’s R&D tax credits schemes hit the headlines. However, rather than a detailed swathe of changes the government simply advised that businesses should expect updates to be announced in autumn 2022.

The UK’s R&D tax credit schemes continue to be really important for manufacturing companies that are typically some of the most innovative businesses in the UK.

Small & Medium-sized Entities (SMEs) can benefit from a saving of corporation tax of around £25,000 for every £100,000 of qualifying R&D expenditure. Loss-making SMEs can surrender losses relating to R&D – for every £100,000 of qualifying losses they can claim from the government a tax repayment around £33,000.

Large companies can also benefit – they can claim a credit of around £10,500 for every £100,000 of qualifying expenditure. Given that the qualifying R&D expenditure of such companies often runs into £millions, this 10.5% credit can be very lucrative.

The motivation of the UK government in providing this benefit is to enhance and increase innovation across the UK. R&D tax credits were first introduced to the UK over 20 years ago and in that time an ever-increasing number of companies has claimed the benefit.

The latest government statistics announced that in year ended March 2020, around £7.4 billion of support was provided to companies, corresponding to £47.5 billion of R&D expenditure – 15% higher than the previous year.

The government has made a commitment that by the year 2027, 2.4% of GDP will be invested in R&D. This investment being a combination of the public and private sectors.

So, on one hand it would seem the fact that more and more companies are claiming R&D tax credits is a good thing and helping support the government’s goal.

However, it is clear that government is not content with the current schemes and this seems to be for three main reasons.

Firstly, government is concerned that there are companies that are making fraudulent claims – perhaps encouraged by certain advisers who are unscrupulous or do not understand the rules correctly.

Secondly, the government is concerned that the SME scheme in particular is not driving the right behaviours of the companies claiming under the SME scheme. Such companies, it claims, are not investing in R&D to any greater degree than they did when the R&D tax credit scheme was established. To that end it has not been a great success.

Thirdly, the government is concerned that the schemes at present do not distinguish whether R&D activity is carried on in the UK or elsewhere. The UK government wants to reward and provide incentives in relation to R&D undertaken within the UK.

As a result, the government is expected to make changes and has announced that it will announce those in autumn 2022. We already know that measures are being introduced to ensure that, with some few exceptions, R&D tax credit claims will be restricted to those for activity being undertaken within the UK.

At this stage it is not clear what other actions the UK government will take. Will it exclude SMEs from certain parts of the schemes, or find better ways to divert funds to those companies carrying out innovation. Might it even provide a higher tier of relief for those companies that are taking ‘real risks’ and seeking to be ‘super innovative’?

What is clear is that the UK government is driven to ensure that the funds it invests in innovation are targeted to drive the right behaviours and produce the right results, so the R&D tax credit schemes will continue to play a key role in this.

After 22 years it is healthy to review the impact of the R&D tax credit schemes and so while this is welcome, it must ensure that it does not disadvantage companies and restrict their creativity.

The schemes should encourage and engender a culture of innovation. After all, innovation is a thread that runs through the generations. Government should not only consider changes to tackle the concerns it has but those that will enhance innovation and create a vibrant community. The question is whether the changes will have the government’s desired outcome by 2027.

To discuss how your business could claim R&D please speak to Stuart Weekes or your usual contact partner.