New research from the Coalition for a Digital Economy (COADEC) highlights several ways our R&D tax relief system could be improved. Updating definitions of what constitutes R&D and simplifying the administrative burden are two of their key findings. But will the government listen when they present to digital minister, Margot James?

Are changes to R&D tax relief regulations really necessary?

How does Britain’s R&D status compare internationally?

This is a good place to start because it gives our current R&D position necessary context. Key statistics paint the picture:

  • Over the last 5 years, UK spending on investment is between 1.66% and 1.68% of GDP
  • In the same period, the average investment spend in other EU countries is 2.07%
  • Germany and Denmark are both at 3%
  • Great Britain ranks 11th in Europe for R&D spending and 19th in the OECD

Basically, we aren’t investing as much as other countries in our innovative projects. This is acknowledged by the government and they have set the target of 2.4% of GDP to be spent on R&D by 2027. By today’s figures, this will require a 50% increase in R&D investment by then.

What did the research find out?

We already have a lot of anecdotal evidence about various issues around the R&D tax credit system that may be familiar to you.

Issues like, how to identify if your work matches HMRC’s definition of R&D, making sure you don’t miss out on any of the eligible costs and explaining your “scientific or technological advance” clearly. This research honed in on some specifics and provides data to support their final conclusions.

COADEC defines itself as “the policy voice of UK tech startups and and scaleups in Westminster, Whitehall and Brussels”. So their focus is on the impact of current UK R&D tax relief policy on startups, although their recommendations would benefit companies of all ages.

Their findings are based on “anonymised data from a tax accountancy firm specialising in tech startups” and their Startup Survey. The survey asked for responses to specific questions and left room for self-worded comments.

Specific statistics

Here are the three statistics we found the most interesting in their findings.

Has your firm every applied for R&D Tax Credits?

  • Once: 32%
  • More than once: 58%
  • No: 10%

If you have received R&D tax credits, how important do you think this was to your firm’s early stage survival and growth?

  • Not important at all: 28%
  • Quite important: 3%
  • Very important: 69%

Overall, how did you find navigating the R&D tax credits process?

  • Simple: 31%
  • Complex: 69%

They also found that 57% of claims took longer than 28 days to process, 40% completing within that time frame.

Many businesses commented that there are particular areas of spending that they consider to be part of usual R&D work, that are not part of HMRC’s definition. They form part of their recommendations.

How can we make R&D tax credits more effective?

It’s already an excellent tax relief, but the research concludes with seven clear ways it can be made more effective. These are under two headings;

Improving Policy

  1. Make buying data sets for tech development an allowable expense
  2. Allow cost of cloud services in R&D claims
  3. Include full UI/UX development work costs as an allowable expense

Tackling Bureaucracy

  1. Make system clearer and give constructive feedback on claims
  2. Increase sector specific technical expertise at HMRC
  3. Create new self-regulatory body to monitor R&D tax credit claim market
  4. Promote R&D tax credit scheme robustly

We will focus on these seven recommendations in the next article, giving a little more detail on each one.

Ultimately, encouraging growth in innovation doesn’t just benefit those companies, but feeds into the whole country’s economic development. Whatever happens with leaving the EU, we want the UK to be a major player on the global market and this requires consistent investment in our creative minds.

 

Jamie Smith