Is the R&D tax credit regime still fit for purpose?

HMRC’s latest annual report, released in July 2024, reveals a staggering £4.1 billion loss in tax revenues due to error and fraud since 2020. In response, HMRC has been required to intensify efforts to combat fraud and abuse. While these measures are absolutely necessary, they also have unintended consequences. The stricter approach may inadvertently be undermining the R&D tax credit regime’s core objective: fostering innovation and efficiently supporting business growth in the UK.

The negative stories surrounding HMRC’s campaign has discouraged many innovative UK businesses from making R&D claims. Additionally, in an effort to ensure no fraudulent claims whatsoever are successful, there are reports that some genuine claimants are being denied relief and experiencing significant delays in receiving funds, severely impacting their business plans.

New barriers for valid claimants

The tighter submission requirements introduced by HMRC coupled with HMRC’s narrower interpretation of what qualifies as R&D is creating  a cost barrier for smaller and prospective claimants. Those with deeper pockets can better manage prolonged correspondence and disputes with HMRC, while smaller, valid claimants are at a clear disadvantage.  This is backed up by recent HMRC R&D tax credits statistics published in September 2024, highlighting a 23% fall in the number of SME claims whilst at the same time the value of claims overall increased from 2022 to 2023. Furthermore, as highlighted by the Chartered Institute of Taxation, HMRC has started removing claims from tax returns without opening inquiries, ‘correcting’ 2,100 claims for R&D tax relief in 2022 and 2023. While addressing fraud is crucial, removing claims without allowing companies to respond denies their fundamental right to defend their position.

The risk to UK innovation

There is no doubt that HMRC is being forced to manage a delicate balancing act in administering R&D tax credit claims. It cannot, and should not, accept fraudulent activity in any instance. Yet there is a risk that too much restriction and deterrence will undermine the objective of the regime. The overriding risk is that, in the long run, eligible applicants may be denied relief, leading to reduced R&D tax credit claims made by businesses. Consequently, innovative companies might seek financial support elsewhere, often outside the UK, generating wealth and jobs elsewhere. This is especially concerning for the pharmaceutical and life sciences sectors, where the most promising companies may be pushed to seek essential early-phase funding overseas, countering the Government’s efforts to position the UK as a leader in these critical areas.

A need for re-assessment

While addressing abuse is important, when anti-abuse measures deter or deny valid claims, a reassessment is necessary. This reassessment of the R&D tax credit regime should focus on aligning the regime with its core policy objective—supporting valid claimants efficiently regardless of size. Improved targeting and greater clarity on qualification criteria would help mitigate abuse.

It is also important to keep in mind that the UK R&D tax regime continues to provide valuable support—an estimated £7.7 billion in 2023-24—to thousands of innovative businesses. The mood music surrounding R&D tax credits should, therefore, shift from focusing on fraud and abuse to emphasising encouragement and support for the businesses this relief was originally designed to benefit. Only then will the scheme meet its original policy objective and foster innovation and growth across the UK.

*This article was first published on Accountancy Age on 11 October 2024. Link to the article here: Is the R&D tax credit regime still fit for purpose? - Accountancy Age

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