The UK’s current research and development tax relief regime is popular with companies, but there are opportunities to provide support closer to spend, to prevent funding limit breaches and to bring it up to date for a digital world, confirms ICAEW.
The UK’s research and development (R&D) tax relief regime is offering valuable support to companies according to ICAEW members, but there are opportunities for improvement, such as switching to regular periodic payments, incorporation into the wider subsidy system and offering support tailored for specific industries.
Following the government’s goal to increase total investment in research and development (R&D) to 2.4% of UK GDP by 2027, a consultation was launched into R&D tax reliefs and their effectiveness in driving innovation. It focused on engagement with, and potential changes to, the UK’s two key R&D tax relief regimes: R&D Expenditure Credit (RDEC) and R&D tax relief for small and medium enterprises (SME R&D relief).
After liaising with ICAEW members working in companies that are carrying on significant R&D activities, as well as those advising clients on R&D reliefs, the Tax Faculty has highlighted several areas where potential changes could be made.
Published as ICAEW Rep 56/21, the faculty’s response highlights the need to update the definition of R&D used in the regime, which is more than 20-years old, to acknowledge the “technological and commercial reality of the 2020s”.
Many of the responses to the review highlighted a desire for more regular support closer to R&D investment spend, rather than a one-off payment after the completion of the tax return process.
One suggestion would be to align the regime with the forthcoming Making Tax Digital (MTD) for corporation tax, opening up the possibility for claims to be made digitally on a quarterly basis alongside the required MTD reports. As well as enabling more regular payments, this approach would provide a way to make R&D tax relief claims more interactive and digitalised.
ICAEW members also highlighted the challenge posed by the interaction between SME R&D relief regime and other state aid grants. The faculty argues that the UK’s withdrawal from the EU offers an opportunity to simplify the subsidy system to enable companies to better see if they are close to breaching government funding limits.
“One possible approach could be to incorporate R&D tax reliefs into the grant subsidies system so that all claims in respect of a particular project are made at the same time and companies can then more easily determine all the incentives they have received,” it states.
Other areas for potential improvement included further expansion of the SME advance assurance scheme and the ability to offer higher incentives for specific industries or activities in response to policy or social needs. This would enable, for example, the government to incentivise development of green technologies or vaccine development.
Hear more at Virtually Live!
ICAEW's flagship digital conference returns for 2021 and includes sessions on tax. Hear from experts including Rebecca Benneyworth and ICAEW's Anita Monteith.
More support on tax
ICAEW's Tax Faculty provides technical guidance and practical support on tax practice and policy. You can sign up to the Tax Faculty's free enewsletter (TAXwire) which provides weekly updates on developments in tax.Sign up for TAXwireJoin the Tax Faculty
This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.