Drive to prioritise innovation incentives for next UK government

Now that the next UK general election is scheduled for 4 July 2024, election campaigns are in full flow. Last week, the ICAEW released a manifesto calling for the next government to push R&D investment above 3% of GDP, stating “This should be seen as the minimum; exceeding 3% would power greater innovation and boost productivity. R&D investment in the UK is critical to developing the technologies of the future.”

Over the last few years, HMRC has run several R&D consultations, some of which posed the question of whether there should be a minimum spend applied to the UK R&D regime, essentially denying smaller businesses the ability to benefit. No minimum spend criteria were introduced, however, a raft of new reporting measures have been announced. These measures were introduced to tackle perceived fraud in the market and to help streamline HMRC’s initial screening and its enquiry process (for example, the introduction of the pre-notification form and additional information form*).

In addition to the new reporting requirements, HMRC also introduced an R&D intensive scheme for SME businesses for accounting periods beginning on/after 1 April 2023, designed to provide additional support to highly innovative businesses. Whilst this scheme is specifically targeted at SME businesses, it is reasonable to assume that it is going to be less effective than originally intended given the compliance hurdles previously mentioned.

It remains to be seen if the next government continue to back innovative British businesses, ensuring the UK is internationally recognised for its leadership in research, excellence in scientific institutions, and innovation throughout the economy.

According to the R&D Roadmap (released in 2021), “Innovation is the process by which ideas are turned into economic growth – where discoveries are translated into products, services and jobs, creating positive change in businesses, public services, government and wider society.” When this roadmap was launched, the UK was ranked 5th in the Global Innovation Index and among the top 10 best countries worldwide to start, locate, and scale a business.

With the recent changes to the UK innovation landscape, the ICAEW manifesto is now raising concerns that the UK innovation incentives are becoming less reliant and ‘less agile to embrace innovation’. The Spring Budget 2024 announced a number of growth measures at local, regional, and business sector levels (see Chapter 4 for more details). The challenge now is whether these initiatives will be built on by the next government, including the ICAEW’s recommendation of integrated regional hubs to target R&D incentives for strategic sectors and outcomes in the public interest.

Given HMRC’s current level of enquiries, designed to drive quality and consistency within the R&D market, it will be interesting to see if the next government supports “a new competition for regional hubs to target R&D incentives and equip the Small Business Commissioner to investigate the barriers firms face to undertaking R&D”.

If HMRC’s initiative of looking more closely at R&D claims does indeed continue to drive up the quality of claims made around the UK, this could increase the impact of this initiative on the UK economy (per GBP of funding provided). While this may deter some valid claimants, the introduction of a new merged R&D tax relief scheme could help simplify things. This new merged regime still differentiates between smaller and larger claimants but does provide additional cash benefits to those larger companies which the government believes will help the economy grow faster and stronger.

Although this approach might be seen as a success in the short term, it is not without long-term risk. The number of smaller or start-up businesses may decline, as entrepreneurs move abroad to more advantageous tax jurisdictions. This would create significant issues further down the line for the UK economy. The ICAEW’s 2024 manifesto highlights the fact that UK R&D investment (% of GDP) already “lags behind the US, Japan and Germany”.

Whatever the outcome, it is clear that innovation incentives need to remain well-positioned at the heart of the new government strategy, to ensure the UK remains competitive across the global economy.

*Requirements introduced for accounting periods beginning on/after 1 April 2023, mean any business looking to claim R&D tax relief for the first time, or who have not made claims in a three-year period, has just six months from the end of its financial year to act. For example, a business with a year-end of March 31, 2024, that has not made any R&D tax relief claims in the three years ended 30 September 2024, has only until the end of September 2024 to notify HMRC of their intention to claim; otherwise, they lose the right to claim for the financial year in question. In addition, for all submissions made on/after 8 August 2023, all R&D claims need to be supplemented by the Addition Information Form (AIF) – a mandatory part of the R&D tax claim process with HMRC.

Author: Chris Ridley - Director, Tax