There is no doubt that the Chancellor outlined a big budget on 30 October. But from the point of view of R&D tax relief and Patent Box, the good news is that after an extended period of review, no further change has been announced.
There is an expectation that rates will stay the same for the merged RDEC and the enhanced R&D intensive support (ERIS) schemes for the remainder of this parliament. We welcome a period of much-needed stability, alongside confirmation that there will be a wider commitment to R&D as a lever for growth in the UK economy. This is supported by further investment in R&D capital projects focused on key innovative sectors.
The current R&D environment is the new norm
The current view is that the R&D tax relief schemes are well targeted and provide value for money, whilst there is a continued emphasis on tackling non-compliance. The levels of scrutiny employed so far, with an enquiry rate of around 17% of all claims submitted, appear to be affecting the overall levels of error and fraud. The estimated levels of error and fraud are down from 17.6% to 7.8%.
We see that HMRC considers claimants with certain SIC codes and claims below £20,000 to be of a higher risk of containing errors. In HMRC’s latest statistics, released in September, we saw a 23% reduction in SME claims by volume, a number that may continue to fall year-on-year as high levels of scrutiny are maintained and focused on SME claims. The year-on-year stagnation in the overall value claimed (from £7.4bn in 2021-22 to £7.5bn in 2022-23) compared to the previously predicted rise in taxpayer spend has created some headroom in the ongoing costs of the R&D tax relief schemes, along with evidence of additionality and spill over particularly in the RDEC scheme.
What is the current state of play in R&D schemes
Although there has been no further change to R&D tax relief, we are already in a period of transition as we move towards the merged scheme and the introduction of Enhanced R&D intensive support (ERIS), alongside other new administrative requirements. Businesses, and their accountants, will need the support of specialists to navigate their claims in coming months and years to understand what rates apply and ensure that they remain compliant with new processes and procedures.
We currently have no indication of change to the Patent Box scheme.
Our predictions for next year
There is more to come on the Modern Industrial Strategy in Spring 2025, where we expect to see a finalised strategy after stakeholder consultation. The Chancellor will have to take important decisions about which industries the UK wants to be famous for and how to turbocharge growth.
The Autumn Budget announced that a consultation will be published in Spring 2025 on the widening of the advance clearance (advanced assurance) scheme. The Advanced Assurance scheme is currently open to first time SME R&D claimants who wish to have greater certainty and clarity over eligibility with the scheme rules before applying. However, this only applies to small businesses with less than 50 employees and less than £2m turnover and is therefore limited. This consultation may be a move from Government to ensure businesses get it right first time.
In light of recent high-profile cases, we expect to see the R&D advisory market contract. This is long overdue and welcome shake out of poor practice and fraudulent behaviour that will leave the industry in better shape. Only R&D advisors with integrity, technical skill and quality assurance will have a place in the market going forward.
