Azets calls on Gov to simplify R&D tax relief scheme

Azets R&D tax specialist Heather Williams has written to chancellor Rachel Reeves ahead of the Budget presenting key proposals to simplify and strengthen the current R&D tax relief scheme. 

The letter calls for a more business-friendly framework that offers clearer, more accessible support to foster innovation and drive growth across the UK. 

The proposals include simpler rules, more certainty for businesses, equal treatment across industries, relief for significant inventions, unified rules for innovation-related reliefs, effective fraud prevention, simplified patent taxation, clearer approval processes, specialist expertise in assessing claims and additional funding avenues. 

Williams said: “The UK’s R&D tax relief system plays a crucial role in encouraging innovation, particularly for small and medium-sized enterprises (SMEs). It provides funding that helps businesses develop new technologies, fostering growth across a range of industries.

“However, there are growing challenges around complexity, uncertainty, and clawbacks that highlight the need for reform within the current system – reforms which could help ensure that R&D tax relief continues to support innovation effectively.” 

Recently, HMRC has revealed that the number of small or medium-sized firms claiming research and development (R&D) tax credits has dropped by 23% in a year.

This decrease has been put down in part to changes in the way claims are administered which require business to submit much more information than was previously needed, as part of HMRC’s campaign to identify malpractice.

The estimated amount of total R&D tax relief support claimed was £7.5bn, an increase of 1% from the previous year, which corresponds to £46.7bn of R&D expenditure, 4% higher than the previous year.

HMRC also says fraud and errors in R&D tax credits claims decreased from 4.9% to 3.6% due to the implementation of digital submission mandates, AIF requirements and increased scrutiny.

Latest available figures from the ONS show that the UK government’s net expenditure on R&D rose to £15.5bn in 2022, from £14bn in 2021, an increase of 10.5%. 

The HMRC statistics are based on R&D relief rates prior to the reform of the system to bring the two schemes closer together and do not fully reflect its impact.

For accounting periods beginning on or after 1 April 2024, a new, single expenditure credit scheme was launched for companies of all sizes.

Two R&D reliefs are now available – the merged SME and RDEC schemes alongside the new Enhanced R&D Intensive Support (ERIS) designed for R&D intensive, loss-making SMEs.

Williams concluded: “By simplifying the system and providing clearer guidance, businesses would be better able to navigate the process and access the support they need to innovate and grow, thus ensuring that research and development continues to play a vital role in driving the UK’s future economic growth and ambitions to remain a global leader in innovation.

“We need more people driving innovation, not fewer. My proposals would still enable HMRC to fight fraud but also incentivise real growth areas. There is such a danger that an attitude perceived as negative will hamper growth or it will be taken abroad.”