For some innovative businesses, the question of where in the world to conduct R&D hinges on the reward offered by R&D tax relief schemes.
Recently, we took a look at the differences between the UK and the USA, but there are plenty of other approaches adopted by different countries that are worth unpacking.
If the UK is serious about R&D investment, are there any lessons to be learned from a more global perspective?
What does the UK actually offer with R&D tax reliefs?
Before weighing up whether other countries are doing it better, it is worth breaking down what the UK is currently offering.
Since April 2024, the UK has moved to a single, above-the-line R&D expenditure credit with a headline rate of 20 per cent.
That sounds straightforward, but because the credit is taxable, the actual cash value a company receives depends on its Corporation Tax (CT) position.
For loss-making firms, the automatic cash benefit has reduced compared with older payable credits.
This means that the headline rate is often not the best indicator of the money that innovative businesses stand to receive.
This results in accountants needing to take a critical view of their client’s work before offering R&D tax relief advice.
While the headline rates are useful for a quick glance, they are less useful for making strategic decisions about growth or investment.
What really matters is whether the credit is refundable, how it interacts with CT, any caps or intensity tests, and how easy it is to claim and receive payment.
How does the UK compare with other countries for R&D tax relief?
Taking an international view of R&D tax reliefs can be complicated due to the different ways that businesses operate and the different ways that relief is calculated.
However, refundable credits are seen as a positive force for any small, loss-making innovators and can often be the key to keeping them in business.
The Canadian approach of offering enhanced refundable credits for qualifying small companies or the French method of giving a very generous tax credit for many claimants often delivers a larger immediate cash subsidy than the UK’s taxable credit.
For larger companies, the UK’s offering remains quite strong, although the previously discussed USA approach of fully funding innovative work is hard to beat.
There are smaller lessons that can be learned from a global overview, as different countries calculate R&D tax relief using different metrics.
Some utilise wage-based reliefs, innovation boxes, or provincial and state top-ups to encourage greater innovation.
These design choices tend to change the effective rate far more than the headline percentage does.
Are there strengths to the UK model of R&D tax relief?
On the whole, the UK system is globally viable.
As much as it might not feel like it sometimes, the UK system does offer simpler reporting and better visibility for investors and boards.
A regime that sits cleanly inside the CT framework helps businesses to better understand the financial benefit of the R&D tax relief scheme.
For multinational groups that value certainty on financial statements, cutting back on excessive paperwork can be of great benefit.
However, the UK system is far from perfect as the shift away from generous payable credits means cash-hungry startups and some labour-intensive SMEs can be worse off.
Tightening eligibility, anti-abuse checks and more aggressive compliance can create friction and delay for legitimate claimants.
Those administrative costs matter in the final decision about where to locate R&D work, as some businesses may elect to avoid the UK if HM Revenue and Customs are viewed as inefficient or interfering.
When considering whether the UK is a good place for R&D, it is worth remembering that R&D tax relief is not in isolation.
The UK still offers top universities, strong services and legal frameworks, solid investor networks in some sectors, and good access to skilled talent.
All of this can help innovative businesses conduct the R&D in the first place, which is vital to do before they even think about claiming relief for it.
If the UK wants to be more competitive for early-stage innovators, restoring or expanding refundable elements and simplifying claim clearance could help.
Better transparency on how decisions are made would also reduce uncertainty and lower the compliance burden for legitimate claimants.
As enhanced clarity is expected towards the end of the year, and more funding is being given to UK R&D, there may be more businesses operating here soon.
If you are looking to help more clients conduct their innovative work, then we are on hand to support you.
Let’s turn the UK into an R&D powerhouse. Speak to our team today!
