R&D tax reliefs have been a cornerstone of UK innovation policy for over two decades. But like any long-running system, it’s had its fair share of twists and turns. Let’s break down how we got here and what it means for businesses today.
Williamson & Croft’s team of expert R&D tax specialists provide an overview of how UK R&D tax reliefs have evolved over the past two decades and what this means for businesses today.
The birth of SME R&D relief
Back in 2000, the UK government introduced R&D tax relief for Small and Medium Enterprises (SMEs) to boost innovation. This decision was driven by a desire to transition the UK towards a more knowledge-based economy and address the country’s lagging commercial R&D spending compared to its OECD peers.
The government chose to deliver this relief through the tax system rather than as grants. This decision was influenced by concerns about the Department of Trade and Industry‘s ability to manage such a scheme effectively. The tax-based approach aimed for better control and efficiency, allowing the Treasury to keep a close eye on costs and implementation.
Initially, the focus was on quick processing of claims with minimal scrutiny. Companies could self-assess their R&D activities, with the intention that this would encourage this new incentive and reduce barriers to claiming.
While this was beneficial for the businesses who accessed the scheme in the short term, this approach gave rise to future challenges in compliance.
Expansion to large companies
In 2002 the government introduced a large company relief after realising it would have a positive impact on larger businesses too. This was set at a less generous level than the SME relief, however, to comply with European Community restrictions.
In 2013, following industry feedback, the Research and Development Expenditure Credit (RDEC) was introduced. The RDEC scheme was designed to make R&D benefits more visible in company accounts as there were concerns that the previous system didn’t effectively incentivise additional R&D in larger companies.
Key challenges begin to emerge
As the system evolved, several issues emerged:
- HMRC lacked technical experts to effectively scrutinise claims. The decision not to employ R&D professionals was based on the belief that it would be difficult to cover all fields adequately and that it might further deprive the industry of skilled workers. This created a mismatch between claimants and assessors.
- The initial emphasis on quick payouts, while well-intended, opened the door for potential misuse. The focus on speed of payment sometimes overshadowed the need for thorough compliance checks.
- Balancing incentives for innovation with necessary compliance measures proved challenging. The system needed to encourage R&D without creating loopholes for tax avoidance.
- Definitions of R&D for tax purposes sometimes struggled to keep pace with rapid technological advancements, leading to inconsistencies in interpretation.
The current landscape of R&D tax credits
R&D tax reliefs continue to play a vital role in supporting UK innovation.
However, recent years have seen increased scrutiny from HMRC, aiming to address fraud and errors. The government has estimated that R&D tax credit fraud and error costs the Treasury £1.13 billion annually, leading to a more rigorous approach to claim assessment.
For businesses, this means a more complex landscape to navigate. The increase in eligibility checks has meant a rising cost due to compliance. While genuine innovation is still rewarded, the importance of robust, well-documented claims has never been greater. Companies need to ensure their R&D activities clearly meet the criteria set out by HMRC and that they can provide evidence to support their claims.
Looking ahead, the key question is how to maintain effective incentives for innovation while ensuring proper use of the system. There are ongoing discussions about potential R&D tax credit reforms, including:
- Updating the definition of R&D to better reflect modern technologies and practices.
- Improving the skills and resources available to HMRC for claim assessment.
- Consider changes to the structure of reliefs to better target support where it’s most needed.
As policies continue to evolve, Williamson & Croft endeavours to stay informed and in order to best advise the businesses we work with who are engaged in R&D.
The system that was started over twenty years ago continues to adapt to meet the changing needs of UK innovation and we will stay up to date with any changes. As always you can expect to see any major R&D tax credit sector updates on our news page.
Navigate R&D tax changes with Williamson & Croft
As the R&D tax relief landscape shifts, our expertise will keep you ahead of the curve. At Williamson & Croft, we use our deep sector knowledge to successfully guide clients through these ever-changing regulations. Our track record of navigating complex claims speaks for itself.
Contact our team of specialist accountants today to ensure that your R&D claims are fully compliant. Get in touch to discuss the particulars of your business.