Autumn Statement 2022: What it means for R&D

The Chancellor, Jeremy Hunt, justified a significant reduction in the benefits of the R&D tax credit regime for SMEs as being driven by a need to address issues of fraud, encouraged largely by the attractive benefits of the regime. He coupled this with an announced increase in the benefits offered under the Research and Development Expenditure Credit (RDEC) scheme, that predominantly benefits larger companies. There was also an announcement that there would be a consultation with industry as to how to make the overall R&D tax regime in the UK “fit for purpose” with the aim to introduce a proposed single RDEC-like scheme for all businesses in Budget 2023. 

The additional enhanced R&D tax credit for SMEs is reduced from 130% to 86%, with the credit for loss making companies being reduced from 14.5% to 10%, however, the RDEC is increased from 13% to 20%. The changes will be effective for qualifying R&D expenditure incurred on or after 1 April 2023. Taking into account the increase in the rate of Corporation tax to 25% from that date, the overall cash impact of the proposed changes on profitable companies will be to reduce the R&D tax credit benefit from 24.7 pence to 21.5 pence in the pound and increase the RDEC benefit from 10.5 pence to 15 pence in the pound. 

It is disappointing that the government consistently focusses on the cost of the R&D tax regime rather than recognising the benefits that are delivered, and what more could be delivered, were the regime to be used more effectively to encourage R&D investment and contribute to economic growth.  

R&D tax credit fraud is being addressed by HMRC and there are existing proposed changes to the SME R&D tax credit regime that should limit opportunities for the unscrupulous to submit erroneous claims in the future. However, using fraud as an excuse to justify reducing the benefits of the scheme completely misses the point as to why the scheme exits in the first place. Neither does it address any underlying weakness of HMRC’s own claim checking process. The R&D tax regime is the method by which a large amount of government support for R&D is delivered and, by limiting the benefits available to SMEs, this brings into question the government’s commitment to supporting the sort of businesses that are, or may become, the backbone of the UK private sector. 

We find it disappointing that a government committed to an ultimate goal of a high-growth UK economy and which aspires to creating “the world’s next Silicon Valley”, lead by a Prime Minister who portrays himself as being close to the world of technology and innovation, has missed an opportunity to use its Innovation Incentives regime to support innovative businesses in a way that could make a significant positive contribution to the future path and success of the UK economy.  

Few would argue that over the decades, if not centuries, the UK’s innovators, whether private individuals or groups, its businesses and its educational research establishments have contributed hugely to the sum of scientific and technical knowledge that supports much of what we take for granted in the modern world. However, the level of expenditure on R&D in the UK has not kept track with the growth in the economy and with other countries over recent years. The most recent UK government statistics show that in 2019, R&D expenditure in the UK equated to 1.74% of GDP, and that this percentage has fallen over a number of years. This can be benchmarked against a 2019 OECD average R&D expenditure by countries of 2.5%, a percentage that has risen over recent years.  

The UK government have a target of increasing R&D expenditure in the UK to 2.4% of GDP by 2027, a pledge that was confirmed by Business minister George Freeman this week. However, based on today’s announcements one must question what role the government intends to play in making this happen and how they intend to use the R&D tax regime to help achieve this objective. At present we see no clear strategic objective underlying the government’s approach to the R&D tax regime, the focus being largely on managing the cost of the regime, for example by reducing R&D tax benefits for SME’s. It is interesting to note that, notwithstanding the increased generosity of support under the RDEC scheme, the overall fiscal impact of the proposed changes to the rates of R&D tax credits will be to reduce the amount of government funding being delivered over the next five years. 

Perhaps most worryingly, more than 20 years on from the introduction of the SME and Large company regimes, revisions of the wider BEIS “mission”, and a clear requirement to build a knowledge economy to drive growth, the UK still lacks a cohesive industrial strategy in government. This is essential for creating a linkage between R&D tax incentives to the goal of a high growth economy. Only by encouraging R&D activities of UK businesses that flow through to contribute to that economic growth and a larger UK economy, will we succeed. A failure to recognise the potential for using industrial policy, or at least the R&D tax regime, to help deliver the wider government ambitions around sustainability and a zero-carbon economy, is an obvious missed opportunity. 

The proposed consultation into the form of the R&D regime going forward is an opportunity to assess the purpose of the regime and to re-focus it on the current needs of our economy and society. There is general agreement that the regime is not “fit for purpose” but government seem more focussed on managing the “cost” of the regime rather than what benefits it could and should be delivering.  

The focus of the consultation and review should be first focussed on the policy objectives of the R&D tax regime, what we hope to get out of the regime, the ultimate benefits to the UK economy and society that we want it to deliver, rather than how we can control the costs to government. 

Whilst there is a broad objective to increase R&D in the UK and to move to a high growth economy, the detail as to how the two relate and connect is lacking in government policy. Particular policy questions that we believe need to be addressed, as a starting point to developing this linkage, are: 

• Is the government really the right body to determine long-term R&D objectives and policy given the short-term nature of political agendas?  
• Is government really committed to investing in R&D activities in the UK in the longer term? If not, will the private sector be able to fill the increasing gap between public sector support and government R&D targets for the UK? 
• Is increased R&D expenditure in itself going to contribute to UK economic growth without clarity as to the end purpose and to how that will happen? 
• How can the benefits of the output from R&D be secured for the UK in terms of exploitation of the intellectual property, the creation of jobs, and the generation of greater wealth? 
• What sort of R&D investment should be encouraged and supported financially by government? How can the existing reliefs be targeted to better effect? Could the R&D tax regime be aligned with other policy aims, for example in relation to sustainability and zero-carbon or to sectors that have a particular economic or social value? 
• What sort of businesses should benefit from the UK R&D tax regime? Should it be confined to those that have are UK owned or headquartered thereby locking the long-term benefit into the UK economy? Given that SMEs make the largest contribution to UK employment, wealth and to UK tax revenues should they continue to have more favourable R&D tax benefits? 
• What sort of R&D activities should be supported through the R&D tax regime, These are the sort of questions that need to be discussed as part of a wider review of the role of the R&D tax regime in the UK and, only once they are addressed, and we have clarity of purpose, can the detailed policy be cast and implemented. 

As a minimum, to try and achieve a step change in R&D levels in the UK, we would like to see the government consider a more targeted approach that supports and encourages the sort of R&D activity that is not simply undertaken in the UK but has greater potential for improving UK productivity and generating UK jobs and wealth, and considers targeting particular sectors, industries or policy objectives in R&D that are perceived to provide the greatest potential for public good. 

Find out more

Join us for a panel discussion on Monday 21 November at 10am where we will be giving our reaction to the announcements made, including analysis from our Chief Economist, George Lagarias.

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