Comment

BERD is the word

There’s growing disquiet among policymakers over whether the R&D tax credit incentive is being misused. The concern has its basis in the annual survey of business enterprise research and development (BERD) – but, according to ForrestBrown’s Jenny Tragner, the government must get its facts straight before it acts.

The government’s annual BERD survey is how it measures how much R&D is happening in the UK, and it’s one way to measure the success of its R&D tax credit regime. It gathers ONS data from surveying around 5,000 businesses to determine business R&D expenditure, funding and numbers of people employed in R&D in the UK.

HMRC also reports annual statistics for R&D tax credit claims and in recent years, has included a comparison between BERD expenditure reported and R&D expenditure on which a claim for R&D tax credits has been made.

But there’s a problem: According to this comparison, there’s a vast disparity between the amount of R&D going on in the UK and the actual monetary amounts being paid out under the R&D tax credit incentive. We’re not just talking a difference of thousands of pounds: it’s billions.

The billion-pound question

The latest set of reliable figures we have are from the 2017/18 tax year. That’s part of the problem itself. HMRC’s statistics are published in the Autumn and include data for the previous tax year. HMRC’s latest statistics – for the year 2018/19 – have just been published, but the data is only partial, so 2017/18 is the last tax year which we know includes complete data from HMRC.

BERD data is calendar year, so the most accurate comparison is between HMRC’s data for 2017/18 and BERD’s for calendar year 2017. BERD reported £23.7bn of expenditure, whilst HMRC statistics showed £35.8bn, 151% of the BERD figure. This isn’t a new phenomenon, HMRC’s statistics have showed more R&D expenditure than the BERD survey since 2014 and it keeps growing.

This discrepancy creates several problems – not least as both sets of data inform policy in the UK and EU. If the HMRC figures are accurate, why isn’t this extra expenditure being reported in the BERD survey so that it can be factored into our measure of R&D expenditure as a percentage of GDP?

The data seems to suggest that over £10bn of R&D investment has gone missing. Importantly, it also calls into question the accuracy of one or both data sets. Both cannot be an accurate measure of business R&D expenditure in the UK.

Hardening the line for businesses

In 1983, a Soviet colonel named Stanislav Petrov averted a potential nuclear war. The USSR’s nuclear early-warning system had alerted Petrov that the United States had just launched a nuclear assault. Petrov, correctly, assessed it was a false alarm for a whole range of reasons.

The moral of Petrov’s story is that it’s always worth taking all the facts into account before acting too quickly. Indeed, if Petrov was able to do so in the face of potential nuclear Armageddon, it’s perhaps not too much to ask for when it pertains to R&D tax credits.

HMRC seems to think spurious claims can explain the difference and there have been increasing attempts to clamp down on these. That the R&D tax advice market suffers from spurious advisers producing low quality claims is certainly true. But the whole truth could be more nuanced, with the government not properly tallying what is and isn’t R&D.

The issue may lay closer to home. That’s not an accusation, however, it’s merely a responsible question to ask before acting too quickly and causing more harm than good. As businesses start to experience a hardening line from HMRC, they may be put off by stories about lengthy compliance investigations and penalties.

Furthermore, a growing number of accountants have experienced problems with spurious R&D tax advisers. Bad news travels fast. More worrying would be if this escalates to a general trend of accountants becoming suspicious of any R&D claim and genuine R&D missing out on relief.

This is surely counterintuitive; R&D tax incentives are designed to incentivise behaviour. If that R&D expenditure, or most of it, is genuine, then it represents many businesses who have used that funding to grow their business, employ new staff, take on more challenging projects, move their sector forwards in technological capability. Exactly what the government intended in designing the incentive.

Making policy decisions based on an assumption that the higher figure doesn’t represent genuine R&D could harm these businesses and deny the very aim of the incentive.

Truth-hunting

I’m intrigued to know why HMRC includes the BERD comparison table into its statistics report; is it to initiate a discussion, or simply to provide data to support its compliance lockdown?

HMRC has been quite open about the challenge it faces from the ever-increasing cost of the R&D tax incentives, and the frustration it has with erroneous R&D claims. It has identified large scale fraudulent activity and stepped up compliance resource and activity. The message appears to be it suspects the amount of relief being awarded is too high.

As evidence that money for R&D tax incentives might be running out, the current consultation on broadening the eligible costs for R&D relief comes with a clear commitment to balance this increase in generosity with a corresponding restriction, so that the measure is cost-neutral.

Having just published its R&D Roadmap and as it works towards its targets set in the industrial strategy, the government needs to tread carefully. Specifically, the ONS should investigate why there’s a growing discrepancy and report this back to the public. Jumping to conclusions could unnecessarily harm the R&D tax credit incentive and the businesses that benefit from using it.

For now, wherever the truth lies, it would seem clear that no one can offer a level-headed analysis of tax policy with incoherent figures. Perhaps the first step is to get to a single version of the truth. Ultimately, all legitimate stakeholders want the same thing: to ensure that funding from the incentive reaches the right businesses, in the right amount, at the right time.


Jenny Tragner is a director at ForrestBrown 

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