The Chancellor provided some insight on his thinking into the research and development (R&D) tax regime during the 2022 Mais lecture, in which he argued that despite the UK having “one of the most generous tax regimes for R&D investment anywhere in the world”, it is “not working as well as it should.” Sunak indicated that UK business spending on R&D amounts to just four times the value of R&D tax relief, compared to the OECD average of 15 times.

During his lecture, the Chancellor made reference to the University of Cambridge Report - Is the UK’s flagship industrial policy a costly failure?

The report cites HMRC’s internal analysis, which indicates that the large company scheme is more efficient in generating R&D investment than its small company counterpart, generating £2.40 to £2.70 of additional R&D expenditure for each £1 of tax relief claimed, compared to the SME scheme, which generated only £0.60 to £1.28.

An overhaul of the R&D scheme began at Autumn Budget 2021. The Budget announced plans to limit relief for expenditure where the R&D activity is happening overseas. This was one of the policy proposals suggested in the University of Cambridge report. A suite of measures followed at Tax Administration and Maintenance Day to try and mitigate the risk of incorrect or even fraudulent claims.

Many would argue that the SME scheme provides invaluable relief, particularly to entrepreneurial start-ups, and will be keeping a keen eye on what policies will be put in place to foster a culture of innovation and growth should any changes be made.

ICAEW’s Tax Faculty will continue to work closely with HMRC and the Treasury to provide assistance around any policy changes, if required.   

Further information

• Chancellor sets out low tax higher growth economic vision
• Chancellor Rishi Sunak's Mais Lecture 2022
• Industrial policy failure - News & insight
• Evaluation of the research and development expenditure credit
• Evaluation of the research and development tax relief for small and medium-sized enterprises