Every year, HMRC publishes statistics to show how the R&D tax relief schemes are being used. In recent years the focus has been on the alarming rise in the cost of this relief with projections running above £10bn, HMT and the OBR were clearly concerned. It is no surprise that this year we have seen a fall in the number of claimants, quite dramatically when it comes to claims by SMEs which are down by 28%.
So with these statistics in hand and a £22bn hole to fill, what could the Chancellor have in store for R&D tax relief?
A move toward sector preferences
The intent of R&D tax relief is to incentivise higher risk R&D activities with the potential to create the greatest value to the wider economy. It will never be for politicians to decide which R&D is the most important, so the current scheme is sector and R&D activity agnostic. However, HMRC has made it clear through their compliance work that some sectors tend not to align to this overall mission of the scheme and that some sectors tend towards a greater level of fraud. So in many ways it would make sense for the Chancellor to call out the type of R&D activity that most deserves the support, and types will be less likely to provide that benefit.
However, let’s not forget that HMRC’s classification industry sector is based on the SIC codes of the registered company and may not reflect the industry sector of the R&D activity. So, for example, innovation in technologies like AI or semiconductors can potentially happen across multiple sectors and there may still be reason to favour a sector agnostic approach.
Right size the scheme
There will be a sigh of relief at HMT that the projections have started painting a very different picture. It is fair to assume that this time next year, even without any further change to the schemes, the number of claimants will drop, and the overall cost will either stay static or decline. The actions taken by the previous Government seems to have turned the tide and have started to make the numbers stack up. But given the dramatic drop in smaller value claims, the next drive for the Chancellor may be to work out who has the “broadest shoulders” and who can go without the tax relief incentive.
Timing and pace of change
It’s clear that the government is not scared of quick action but there is a hint they may be willing to take some time with regards to R&D. The industrial strategy green paper will be released in October 2024 with outcomes by March 2025. This year’s stats show an on-paper saving against forecast has already been achieved. This may provide some breathing space and change to R&D tax relief may not be the first lever that the chancellor pulls.
Deployment and compliance
With the 5,000 new tax compliance officers announced, HMRC will have a record level of resource to close the tax gap, to ensure that taxpayer money is spent well and to reduce fraud. It feels like HMRC are now well set up to achieve these goals. The greatest challenge will be establishing the depth of knowledge and understanding necessary to grasp the complexities in the R&D activity that the government wishes to support. It could be all too easy to get boxed in to a rigid tick box mentality.
The truth is that we don’t have long to wait until we find out exactly what the Chancellor is thinking with the Budget on 30 October. To find out more join us for a debrief webinar on 31 October to discuss any announcements and what they might mean for the R&D tax relief schemes and how they will impact business.
