Overview of the R&D Tax credits consultation need and response

Innovation is critical to economic growth and prosperity. The Government has long recognised that a competitive R&D tax credit scheme is an important driver of its ambition for the UK to become a global leader in science and innovation and achieve its target to raise total investment in research and development to 2.4% of UK GDP by 2027.

Earlier this year, HMRC opened a wide ranging consultation on R&D credits to get the views of businesses on how the incentives could be improved to encourage more investment in R&D.

Some of the Government’s key drivers for consulting on the effectiveness of the R&D regimes include:

1. Ensuring the UK regime is and remains an internationally competitive place to invest in R&D.
2. Modernising the regime - the regime has been in place for over 20 years in the UK, and while there have been a number of changes, the question remains as to how it best serves innovative business today.
3. Ensuring the incentives are properly targeted, to encourage increased innovation in the UK, and reduce any potential abuse of the regimes.

We asked over 200 businesses to share their views with us on how the current R&D regimes operate, whether they impact R&D decisions and gather views on the potential reforms of the R&D reliefs. The key themes that came out of our survey were:

• Almost half of the respondents currently take R&D credits into account when making investment decisions which suggests there is some positive impact but more needs to be done to influence R&D investment.
• Businesses want certainty around the incentives available and require the regimes to be simple in design.
• The complexity around funded R&D for SMEs is difficult to navigate, and creates uncertainty.
• Most respondents supported increased incentives when the R&D benefits society as a whole eg: the net zero agenda and investment in green technology.
• The majority of respondents believe change is needed to minimise abuse of the regimes and would support changes to the way in which the regimes are administered.

There is scope for wide-ranging change to the reliefs as a result of the consultation, which is likely to result in winners and losers. Possible changes include the expansion of reliefs to include cloud, data acquisition and capital expenditure and restrictions that would remove the eligibility of overseas costs.

It's clear there is real support from the Government, HMRC, business and advisors, around the importance of the R&D regimes. That support is key in driving innovation in the UK, increasing the UK’s competitiveness on the international stage, and critical for businesses assessing their strategy post COVID-19 and Brexit.

Ultimately the R&D regimes need to ensure that their positive factors (eg: accessibility and value of relief) are balanced with the cost to the Exchequer. They must also reduce the likelihood of abuse.

In this series of blogs, we’ll be setting out in detail how we think that would work in practice: supporting increased innovation in the UK while also providing greater clarity and certainty to taxpayers.

Please speak to Rachel Moore, Rohit Patiar or your local PwC contact for more details.