The Government is set to deliver its first Autumn Budget on 30 October 2024, with significant changes proposed to public finances in a bid to close a large gap in the Treasury’s purse.
We know that this is shaping up to be a landmark Budget for UK taxpayers and the tax code.
Having written separately on what the Budget could mean for R&D, we now want to take a look at how the R&D tax scheme looks heading into the Budget – and what this could mean for the long-term incentive to innovate for the UK’s highest-growth sectors.
The position in industry
The Bioindustry Association (BIA) made a splash in recent weeks when it suggested the Government should consider moving to a sector-specific form of R&D tax relief – making the claim that non-compliance in other sectors is negatively impacting R&D-intensive sectors, such as life sciences.
The practical unfeasibility of such a scheme lies in the fact that the scheme is purposefully broad, designed to reward innovation wherever it occurs – not just in specific sectors.
A sector-specific scheme would likely result in scientific and technical developments in industries where R&D is less common, such as textiles or food, going unrecognised by the scheme.
It may make those conducting qualifying work hesitant to submit a claim, undermining the ultimate goal of the scheme to incentivise all eligible R&D projects.
However, these calls demonstrate a wider feeling towards the R&D tax scheme – that it may have become too broad and thus open to spurious claims, which inevitably trigger high levels of HMRC investigations.
While we understand this position, this is generally based on outdated evidence and data from the years prior to overhauling the scheme in 2023/24.
We still find that there is a reluctance from some businesses with eligible projects to make a claim – particularly in the face of the position adopted by HMRC’s enquiry programme.
The Government position and HMRC
The position of the Government on R&D and R&D tax relief seems to have been at odds in recent years.
The Government has pledged substantial growth and investment in high-growth, R&D-intense sectors such as green energy and life sciences. It aims to drive both public funding and private investment into these sectors which, under the current framework, would undoubtedly drive further claims for R&D tax reliefs and credits.
However, many claimants and accountants are finding that HMRC does not always act in accordance with this goal – with many businesses and their accountants facing enquiries and challenges from HMRC against valid claims.
In particular, we know that many investigations are undertaken after payment of R&D tax credits has been made, resulting in cash flow problems for SMEs.
On balance, however, HMRC is acting in accordance with Government directives and in response to a genuine challenge to the Treasury as a result of how some were using the scheme in previous financial years.
It’s now not a question of criticising HMRC or claimants, rather a question of working collaboratively to prepare compliant that make it easier for HMRC to minimise the impact of its anti-abuse measures on genuine claimants.
Shifting perspectives
Despite calls for changes to the scheme, whether that be a reduction in HMRC enquiries or support for specific sectors, we’re unlikely to see sweeping changes in the R&D tax scheme come the Budget.
The scheme already underwent these changes this time last year, so we’re now in a position of ‘wait and see’. Anecdotal evidence suggests that compliance is trending up, but it will be a number of years before we see the true impact of the scheme as it stands.
In the meantime, we need a collective push towards collaboration between the Government, the taxpayer and advisory services to return to the root purpose of the scheme – to reward and incentivise innovation.
This will be critical to achieving plans for development and investment across the country.
For advice on preparing an R&D tax scheme for your client or enhancing your advisory service, please contact our team today.