Despite a record £33.1bn in R&D spending, British businesses continue to trail their European peers. R&D tax relief could help bridge this gap, but is it fit for purpose?
The UK ranks 11th in the EU, according to the Office for National Statistics, sitting behind the tiny nation of Slovenia and far behind the likes of Germany and Sweden. The ONS figures showed Britain invested 1.67% of its gross domestic product, below the EU average of 2.03%.
Theresa May pledged last year to increase R&D spending in an effort to bring Britain into line with other developed countries, as the government tries to increase productivity. This focus on productivity, and according to Treasury insiders the Chancellor has an “obsession” with it, brings the R&D credit to the fore.
“The key aim of R&D tax credits is to incentivise companies to increase R&D spend in order to address this issue,” said Jenny Tragner, a director at R&D consultancy Forrest Brown. “Private sector spending on R&D as a percentage of GDP has stayed very static for a number of years (at around 1.7%) with the aim being to increase it to 2.4%.”
But this increase will be hard to come by according to Ayming’s director of R&D tax and grants Justin Arnesen. According to Arnesen, HMRC’s R&D support programme is difficult to engage with. “The reality is that the definition of R&D used by HMRC is alienating, and so most mistakenly feel it does not apply to them.
“For example, the document which defines R&D was last updated in 2010, the example it uses is a DVD player - things have definitely moved on. Added to that, the administration of the scheme makes it impossible for companies to plan around it, because the outcomes are not easy to predict. You can’t factor the money into your forecasts.”
Arnesen’s personal experience with HMRC has also proven difficult. While the government is eager to encourage R&D relief, the UK’s tax authority remains wary of large figures. A recent claim for a construction client, Arnesen claims, was held up because “they were so petrified of the number”.
Adding to the complexity is the inconsistency in how claims are assessed. “There’s meant to be this one HMRC voice, but that doesn’t exist. There’s inconsistency with the inspectors. They’re trying to disprove what very qualified people are telling them.”
For Forrest Brown’s Tragner, there are “too many factors that can affect the cash benefit of an SME claim”, as it is heavily dependent on a company’s wider tax position. “This makes it difficult for SMEs to predict their expected cashflow year-on-year, even when they can accurately forecast their spend on R&D.
“Adjusting the SME R&D tax credit scheme structure to align it with the above-the-line structure of RDEC for large companies would help SMEs to better forecast their financial position,” continued Tragner. “The RDEC scheme is designed to increase visibility and certainty of the incentive, making it more effective at influencing investment decisions.
“We believe this change would similarly increase the number of claims made by SMEs, making it more attractive as a way of positively influencing investment decisions. This, in turn, would boost the overall level of R&D activity in the UK.”
Barrie Dowsett, the CEO of Myriad Associates, also takes a more diplomatic view than Arnesen’s. He said, “It’s important not to underestimate the task of providing guidance covering many sciences and technologies. I’m aware, as a member of the HMRC R&D consultative committee, that HMRC is developing guidance around emerging and enabling technologies.”
There remains, however, a fundamental issue in how R&D tax relief claims are assessed, said Dowsett. “They’re typically assessed by R&D inspectors that have little knowledge or understanding of the industry sector they’re assessing.
“They can refer the claim to a specialist, although in our experience this option is rarely exercised. So I do question whether government funding is going to projects that ‘advance science or technology’ over and above the current State of Art (SOA).
“In sum, the desire and funding pool is available from the government, the question is it being used effectively to maximise productivity?”
How’ve you found dealing with the R&D tax relief scheme? Let us know!
About Francois Badenhorst
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