HMRC’s annual R&D tax relief statistics are due to be published on 30 September and will provide the detail around the use of the R&D tax relief schemes in 2023-24.
As we anticipate the release, I’m reminded of the story of Icarus. Have wings been burnt, and are we ready for an inevitable fall from grace?
I don’t want to be drawn into an ever-present commentary on standards and poor practice, which now feels like it’s fuelled by a LinkedIn babble rather than constructive, professional dialogue. However, what these stats will preview is the real impact of the changes in legislation, and indeed the approach by HMRC, that really took hold in 2023.
How did we get here
To recap, after some rumblings dating back to the Judge business school paper suggesting R&D tax relief to be a costly failure, the Tory government announced sweeping changes in November 2022. The stated aim was to help balance the scheme and hopefully reduce fraud and error.
Then, from April/May 2023, we witnessed an unprecedented enquiry campaign by HMRC tasked with hunting out error and fraud. Let’s pause there – HMRC wasn’t only motivated by noble intent. They were hellbent on creating stats that proved R&D did not exist in certain industries, forcing small businesses to withdraw their claims when the risk v reward v time equation didn’t stack up. This all got conveniently wrapped up into the error and fraud outcomes and resulted in perhaps irrevocable damage to business confidence. I have always been a vocal supporter of HMRC, but this draconian attempt at making the numbers fit was simply inexcusable.
How will this impact the numbers
So how will these actions play out in the numbers? Well, if I were going to have a flutter, I would be very confident that the overall cost of the scheme, qualifying expenditure, and the number of claimants would have dropped significantly. We saw some of these play through in the numbers released in 2024 (referring to 2022 -23 claims), but my guess is that was only the warming of the wax, and Icarus still had some flying time.
If it’s a safe bet, I don’t think this will be a terrible outcome, as it should give Treasury the confidence that the scheme has now been fixed, rightsized, and some trends, albeit possibly engineered, will emerge.
Will SME’s have seen the biggest impact
If we see the further reduction in small claims, reinstating a di minis level for R&D claims feels like a sensible conversation to have. I am a strong advocate and suggested it to a Treasury roundtable I attended earlier this year. This is not because I don’t back small businesses. Rather, it is because HMRC is simply not the right deployment mechanism for this type of cheque. Better to take the £300m-£500m currently delivered in small R&D claims and deploy this to start up and small businesses in a different way. Small businesses should not have the taxman banging at the door like we saw in 2023. They were forced to surrender, and it is simply not right.
Which sectors will have taken the hit
You can be sure that some sectors will see a significant drop, such as education, construction, and possibly financial services, which worries me. Labour have not been shy in saying they only support tax relief for R&D that otherwise would not have happened. I think that is completely the wrong starting point. Would large financial services businesses invest in technology, invest in digital, invest in AI, regardless of tax relief – of course they would. Does the UK remain more competitive to hire that talent with tax breaks – of course it will. The government can control some R&D projects, such as the excellent work at our universities and AIRA, but don’t tell businesses how they should innovate.
And it’s not over yet…
There may well be more to come; the merged scheme impact will not be reflected in this year’s numbers, so we have some time to wait until we see that outcome. What I can tell you is HMRC has developed well over the last 12 months, and I hope that the overzealous approach is assigned to history.
One piece of the puzzle that is still outstanding is the most recent consultation, which considers agent standards. This piece of work applies to all tax, not just R&D, but it won’t be lost on anyone involved that the examples that were given of poor practice related specifically to R&D.
There are some red flags in the current drafting that potentially open the door to an abuse of power by HMRC. I hope that these will be mitigated in final drafting and that this work on agent standards will be helpful. The real rogue agents in R&D may have left the market, but the lack of education remains. There are still countless advisors (including those at the largest accountancy firms) who don’t know what they don’t know. Whilst it’s difficult to quantify, this still poses a risk to the external optics of the R&D tax relief scheme. Now we just need to make sure the policy is focused in the right way so we make the most of this government’s investment in R&D.
