R&D tax credit and innovation predictions for 2022

The total value of R&D tax relief is growing year on year. Recognising that tax relief plays an important role in incentivising investment, the government launched a wide-ranging consultation of R&D tax reliefs from March to June 2021 to help reach their target of raising total investment in research and development to 2.4% of UK GDP by 2027. Following on from this, the consultation reforms recently announced in the Autumn Budget 2021 are set to have an impact on the R&D tax credit landscape. By being prepared for these, accountants can help clients improve their bottom line without getting tied up in unforeseen complications and obstacles. R&D tax relief scheme: 2022 predictions Using R&D tax relief to refocus innovation in the UK It is clear that investing in the foundations of innovation in the UK is paramount for a strong, green and agile economy in 2022 and beyond, particularly as the country recovers from the pandemic. To encourage this, the Autumn Budget re-emphasised a greater commitment on R&D in this country, with third party labour and subcontract costs only qualifying if the research and development is all conducted in the UK. This helps the country to secure the benefits that spillover from the R&D activities (such as new skills that have been gained). To further ensure that it is the UK that directly benefits, companies who claim for expenditure on EPWs (Externally Provided Workers) may be limited to EPWs within UK PAYE/NIC. There is ongoing discussion regarding what exemptions may be appropriate and draft legislation with the exact details are due in the Autumn. If your client is undertaking work for others as a subcontractor, it is vital to know where the R&D benefit sits (see the Quinn case). It would not be a surprise if clients began to ask and be proactive at contract negotiation stage about where the R&D benefit will sit, as this can have a significant impact on the scheme benefit. Increase of HMRC inspection rates The chancellor’s budget also included protecting the integrity of R&D tax relief with a course of action designed to tackle and prevent exploitation and perversion of the scheme. To help stamp out potential abuse, HMRC now have 100 new inspectors with a predominant focus on R&D enquiries, that will invariably drive income for HMRC from tax investigations. Previously the approach was steeped in good intent and trust which has sadly been broken, so to gain control they are moving to an environment which will be the reverse — inspectors are now on the lookout and gloves are off. The R&D tax relief schemes follow BEIS Guidance which is subjective and can be extremely complex in its application. Any inexperienced R&D tax credit advisor who makes upfront promises, offers cheap prices yet doesn’t put in the time required, will soon be caught out when substandard claims they have made for clients come to light. Ultimately, the impact of these changes mean that there will be greater scrutiny on R&D and everyone in the industry will be held to higher standards. Moving towards inclusion of data and cloud costs in R&D tax relief schemes The government will be supporting modern research methods by expanding qualifying expenditure to include data and cloud costs. Many of the latest R&D projects require a huge amount of cloud computing, data processing and analysis, so this will be of significance. Start-ups and technology companies in particular will benefit. Although new categories of expenditure will be implemented during 2023, it is advantageous to plan ahead in 2022 for how these costs will be tracked for clients so that innovation is recognised and opportunities are not missed. Why these predictions matter for accountants As R&D tax relief is modernised there will be more opportunities for innovation and sustainable growth. But with greater scrutiny from HMRC coupled with far too many poor advisors making misleading claims, the need for expert advice has never been more crucial. With the government cracking down, you can expect to see clients facing R&D enquiries which have historically been rare. Enquiries now will be more common and in our experience, the questions tend to be around technical compliance and rarely start with the numbers. What is critical however is that you know that if your client has used an advisor, that advisor has reconciled all financials and not leaving you with a raft of questions. Accountants are ideally placed to understand your clients’ business and can work in partnership with a specialist R&D tax advice to make sure your clients are getting the right service. Moreover, are your client’s seeking that R&D advice elsewhere without your knowledge and is that service robust? Key takeaways The UK is set to benefit more from spillover from R&D activities because support is being refocused towards innovation in the UK. Substandard “R&D tax credit advisors” will be caught out by an increase in inspection rates and more stringent inspection measures. R&D tax relief schemes are being modernised with new categories of expenditure including data and cloud costs. 2022 marks the start of a new era for innovation if clients are able to seize financial opportunities by utilising expert advice. By Luke Hamm, CEO of GovGrant