Driving UK Innovation: Azets' Advocacy for R&D Tax Relief and the Government's Response
Research and Development (R&D) tax reliefs are a cornerstone of the UK economy, empowering businesses, particularly Small and Medium-sized Enterprises (SMEs), to innovate, create jobs, and foster long-term economic growth. At Azets, we consistently advocate for a tax relief system that is simple, certain, and effectively supports the UK's most innovative companies. Heather Williams, R&D Partner, recent engagement with the Treasury highlights both the ongoing challenges and the government's commitment to supporting R&D.
Azets' call for simplicity and certainty
On behalf of the 93,000 businesses claiming R&D tax relief annually , Azets outlined a "wish list" to the Chancellor of the Exchequer, emphasising the critical need for easy access to funding and certainty that legitimate claims will be accepted. We hear directly from clients about the challenges they face, including:
- Rejected AI R&D claims: Despite the government's stated interest in areas like AI, companies have seen AI R&D claims rejected on the basis that AI and Machine Learning are "established technologies". This approach can be a significant deterrent to vital investment in this field.
- Issues with advanced assurance and repayment orders: The current advanced assurance system needs to change as it is not working. Businesses have also been ordered to repay funding more than a year after it was initially granted, after all the money has been spent on wages, prototypes, and vital materials. We believe payments should not be made until they are approved, to prevent such issues.
- Complexity and lack of clarity: Busy entrepreneurs do not have the time to trawl through pages of legislation or guidance. They need simpler rules that are easy to interpret and provide certainty to make important decisions. We advocate for one set of rules, preferably for all innovation reliefs.
- Disparity with creative reliefs: Unlike other creative reliefs for video games, films, or theatre productions where grants are simply paid, R&D tax relief requires extensive justification. We want the same certainty for investments made by the UK's most innovative businesses. Our wish list also includes a 10% tax on any profits derived from patented technology and the removal of the 'seven step calculation'.
Our proposals to the Treasury aimed to address these concerns, focusing on simpler rules, certainty, equality with other creative reliefs, effective fraud prevention that doesn't hinder genuine claims, and a more streamlined approach to taxing patented technology. We also called for appropriate allocation of staff who understand the advances in claims being investigated , and additional ways to get funding for AI and other specified technologies.
The Treasury's response and future commitments
The Exchequer Secretary to the Treasury, James Murray MP, acknowledged the critical role R&D plays in driving innovation and economic growth, as well as the benefits it can bring for society. The government reiterated commitments made at Autumn Budget 2024 as part of the Corporate Tax Roadmap, designed to provide stability and certainty for investment decisions.
Key points from the Treasury's response include:
- Maintained generosity: The government is committed to maintaining the generosity of rates in both the merged R&D Expenditure Credit (RDEC) scheme and the Enhanced Support for R&D Intensive SMEs (ERIS). Companies doing qualifying R&D will continue to receive between £15 to £27 for every £100 spent.
- Significant support: The RDEC rate of 20 percent represents the joint highest uncapped headline rate of R&D tax relief in the G7 for large companies. The ERIS scheme will provide around £1.3 billion per year to approximately 20,000 R&D-intensive, loss-making SMEs.
- Simplified system: Merging the SME and RDEC schemes has simplified the system, as there is now a single set of qualifying rules for the vast majority of R&D claimants. The enhanced support for R&D-intensive SMEs shares many of the merged scheme's rules.
- Future simplifications and evaluations: The government is committed to considering longer-term simplifications and incremental improvements to the effectiveness of the reliefs. They will periodically evaluate the R&D reliefs to ensure they are as effective as possible and underpinned by a credible, up-to-date evidence base. The government also committed to strengthening the administration of the reliefs.
Overall, R&D reliefs are estimated to support £56 billion of business R&D expenditure in 2029/30, roughly a 20 percent increase from £47 billion in 2022/23. The government keeps all taxes under review as part of the policy-making process.
What this means for businesses
While the government has demonstrated a commitment to supporting R&D and has taken steps towards simplification, the journey towards a truly seamless and certain system continues. It is crucial for businesses to stay informed and proactive in their R&D tax relief claims.
Our advice:
- Stay informed: Keep abreast of the latest HMRC guidance and policy changes regarding R&D tax reliefs. The government continuously reviews all taxes.
- Seek specialist advice: R&D tax relief can be complex. Engaging with specialist advisors can help ensure your claims are accurate, compliant, and maximise your eligible relief.
- Proactive compliance: As the government strengthens the administration of reliefs, proactive compliance and robust documentation are more important than ever. Ensure you have competent professionals assisting you.
We are here to help
We have supported many businesses with the full claim process, making sure they are fully complying with all HMRC requirements and making their case as robust as possible. If you are considering an R&D claim or have encountered issues with one you are in the midst of trying to process, please get in touch with our specialist R&D Tax Relief team.
