Interesting times are ahead for the R&D Tax Credit market.
Year on year growth in the number and value of claims, no regulation and no barriers to entry has led to a massive increase in the number of ‘advisors’ in the market.
By some estimates, there are up to 250 specialist R&D Tax Credit advisors in the UK, plus a multitude of accountancy practices with varying degrees of expertise.
However, in recent years it has to be questioned what is driving what here – how much of this market growth is actually a result of these new ‘advisors’ stretching the boundaries of the scheme and creating/inflating claims for companies who probably shouldn’t be making claims?
Certainly the value of R&D claimed for is far in excess of the official estimates of the value of R&D undertaken in the UK – the difference in no way explainable by overseas subcontract work.
Even before the pandemic, HMRC calculated that the value of R&D claims for the year ending March 2020 would be worth £7.4 billion – an increase of 19% over the previous year. The number of claims submitted grew by 16% in the same period.
HMRC has finally recognised this, and is at last taking steps to clamp down on ‘fraudulent’ claims through measures such as increased staff levels and ‘nudge letters’.
Most recently it announced that it has paused some Research & Development Tax Credit payments whilst it investigates a number of claims which are described as being “irregular”.
In a short statement, HMRC stressed that the majority of R&D relief claims are unaffected but said there will be some delays to its usual processing times to ensure that any abuse of the relief is prevented.
The HMRC statement specifically references claims that may be “incorrect, inflated or fraudulent” and points to widespread general problems within the R&D scheme.
It is now generally accepted that some R&D claims are clearly inflated beyond all reasonable levels in terms of R&D expenditure and many more contain projects that don’t meet the qualification criteria for R&D.
However, this announcement seems more likely to indicate a deeper level of fraudulent activity. To make such a dramatic announcement that all R&D claims could be subject to a delay in processing and issuing a request for claimants not to contact them indicates that the scale of this particular problem is significant – and potentially not isolated.
What next?
Add the proposed restriction on overseas R&D expenditure into the mix and the signs are all pointing towards, at best a levelling off and more likely a decline in the scheme in the near future, as HMRC tackle the abuse of the scheme.
However, given that the Government wants R&D expenditure to increase from 1.7% to 2.4% of GDP, and there appears to be an increasing disconnect between the R&D Tax Credit scheme numbers and actual R&D expenditure, something else needs to be brought into the mix. A radical overhaul (as indicated may happen by Sunak) to improve the effectiveness and competitiveness of the R&D Tax Credit scheme, or an additional/replacement scheme is urgently required.
Cutting R&D Tax Credit claims down to match actual R&D expenditure is a first step – saving the Government several £bn in tax relief.
The question then is how best to reallocate this money – essentially to address the ‘reluctance’ or inability of companies to invest in true R&D.
Clearly the R&D Tax Credit scheme is not attractive enough and too simplistic to overcome the main blockers to innovation
1 Fear of failure
2 Conflicting goals in the organisation
3 Lack of innovation skills
4 No clear definition of innovation
5 Disagreement over who owns innovation
To embrace Innovation, businesses should consider adopting a balanced risk approach to innovation.
This approach would require companies to
- Up their game as regards market intelligence and forecasting
- Recognise that innovation can cover any aspect of the business where a competitive edge can be achieved and maintained.
- Recognise their strengths and weaknesses.
- Prioritise innovation ‘projects’ based on potential return and risk – the ability to scale rather than just grow steadily.
- Embrace partnership and collaboration/co-opetition opportunities.
- Develop clear quantifiable and time-bound milestones to measure performance against
- Treat this process as an integral part of their business strategy.
- Be creative in seeking funding for the projects.
Therefore any new incentive needs to draw a line under the current position and seek to move companies beyond it – benchmarking activity against global best practice and setting KPIs that are more than just spend.
Whatever happens, there is likely to be a major restructuring of the R&D Tax Credit market – with many ‘advisors’ ceasing to exist as they can’t meet the necessary standards, or are not competitive.
Others will have to adapt to reflect any ‘new’ scheme.
