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Should the UK increase its R&D budget?

Author: Tom Mason

R&D funding and tax reliefs have been brought into the spotlight as the UK aims to become a leading nation in the field of scientific and technical development.

A recent report by Dr Mann Virdee of the Council on Geostrategy and a statement by Onward, Reforming Whitehall to support science and technology have called for an increase in the amount the UK invests in R&D activities, including to support tax reliefs.

Findings argue that the UK’s R&D budget should be brought in line with the nations investing the most as a percentage of GDP – including the United States, Belgium and South Korea.

This would see R&D funding support increase almost two-fold, from 2.9 per cent to 4.2 per cent.

Budgeting for R&D

Part of the reason that R&D tax relief came about in the first place is that scientific or technical R&D can be costly and needed to be incentivised.

Reforming Whitehall noted R&D tax reliefs, reformed in the 2023 Autumn Statement to include a merged scheme and enhanced compliance measures, as a key element of the Science and Technology Framework (STF) – a key anchor for the UK’s R&D budget.

The STF itself is a cornerstone of the UK’s plan to become a global innovator and leader in science and technology.

It seems likely, then, that any increase in the R&D budget would target both R&D tax reliefs and direct investment – and would prioritise industrial science and technology advancements.

What does this means for your clients?

We cannot say for definite how or whether your clients would see a change in R&D tax support claimed if the UK’s R&D budget increased.

However, it seems likely that the current HMRC approach to compliance would persist as the Government tries to eliminate fraudulent and incorrect claims and optimise the use of additional funds.

Any financial support for growth and R&D is deployed with the awareness that it needs to be targeted where it will achieve the most benefit, making non-compliant claims a major red mark in the R&D funding ledger.

We would also anticipate little changes in the rates of relief and qualifying expenditure, as funding to cover the cost of R&D tax relief would only form part of an enhanced R&D budget.

Direct investment in R&D is likely to be higher on the agenda, particularly as the UK targets growth in specific sectors such as sustainable technology and energy.

What accountancy firms and clients would need to look out for is how any direct funding received relates to expenditure and R&D tax relief claims.

Ultimately, whether a higher R&D budget benefits innovative businesses will depend on how funding is split between investment and R&D tax relief, as well as which sectors and projects receive substantial support. It must be administered efficiently and funds ought to be accessible to businesses doing innovative work.

Keep in touch with us to stay informed on the latest developments in R&D tax.