A new era of Competitive R&D tax credits?

The Government has long recognised that a ‘competitive R&D tax credit scheme’ is an important driver of its objective for the UK to become a global leader in science and innovation. We know that many Fintech Businesses rely on R&D credits as a valuable funding mechanism for innovation so it is imperative that Fintech Businesses take note and engage with the recently launched government consultation which could bring the biggest reform of R&D credits since the SME scheme was introduced over 2 decades ago.  This is especially important in Scotland where the number of Fintech companies has grown from 26 (2018) to upwards of 155 in 2021. 

This is a once in a lifetime opportunity to bring the R&D regime up to date and ensure it is well targeted and globally competitive.  With over £200m in R&D tax credits claimed by businesses in Scotland, it is important that businesses engage with the consultation and share their insight on how the R&D regimes can be improved to help them invest in innovation.

The consultation is wide-ranging and it is clear that whilst there is no doubt that the government is fully committed to increasing UK R&D spending, in a backdrop of record government borrowing, the R&D regimes must provide value for money and be highly effective at encouraging investment in innovation. The focus of the consultation can be segmented into the following key areas where we’ve shared our initial thoughts on the relevance to Fintech businesses:

• Structure of the R&D regime - particularly whether the SME and large company R&D Expenditure Credit (RDEC) schemes be combined? 

Currently, there are two R&D regimes - the SME regime which offers high cash incentives (up to 33% of spend) and the RDEC regime (10% cash benefit) for those businesses which do not qualify for SME credits. The consultation suggests abolishing the SME scheme and a move to “RDEC for all with the key benefit of the RDEC regime over the SME credit being the ability to account for the credit ‘above the line’ (i.e. improve profits). However, it is likely different rates would still be needed for different-sized businesses. 

Given the government’s commitment to encouraging investment in key high-tech industries, could this consultation also provide an opportunity to implement varying credit rates depending on the sector and activity being undertaken? Clearly, high-tech industries such as Fintech play a fundamental role in Scotland and could benefit from a regime that offers greater incentives for high tech innovation.

• Ensuring the UK R&D credit system is internationally competitive

The government has repeatedly stated its commitment to ensuring the UK is seen as a global leader in Research and Development, with the aim of increasing R&D expenditure to 2.4% of GDP by 2027. The latest consultation clearly demonstrates that the government sees the UK tax credit regime as part of its strategy to help encourage investment in UK innovation and as part of that, understands the importance of the UK R&D tax credit regime being globally competitive when businesses look to locate R&D functions. Scotland is becoming increasingly known for being one of the UK leading Fintech hubs and is routinely considered as a key location for R&D centres. For Scotland to continue to benefit from the positive cascade effect offered by such inbound investment, in an increasingly competitive world, it is important that the UK’s R&D regimes remain globally competitive.

• Review of R&D definition and Scope of eligible costs

The definition of R&D and eligible costs are the cornerstones of the R&D regime and compelling responses on these key areas have the potential to lead to fundamental changes in the R&D regime. This includes potential inclusion of Cloud Computing costs such as SaaS, IaaS, and PaaS as eligible expenditure, in addition to on-prem license costs used for R&D. Currently, the UK R&D regime is one of the most generous regimes in terms of allowing overseas expenditure to qualify under the externally provided worker rules. There has long been a debate about whether the inclusion of such costs really contributes to encouraging investment in UK R&D. However, the eligibility of such costs does mean the UK and Scotland is attractive for global businesses looking for an R&D Hub with its unique ecosystem of academia, technology, science and innovation infrastructure.

• The operational effectiveness of the regimes

Improving the administration of R&D credits including whether it should be part of the tax return filing and the role of agents in assisting R&D claimants is a key part of the consultation. With the significant increase in R&D claims over the last 5 years, it’s not surprising that the administration and review of claims have become a challenge for HMRC. And there are growing concerns within the Government that R&D tax reliefs are open to error and potential abuse. Whilst the more straightforward nature of the documentation requirements and lack of ‘preapproval requirements’ makes the UK regime more vulnerable to abuse, there is a recognition that this approach makes it more attractive when compared to other global R&D regimes with extensive preapproval requirements. So any changes to the administration of the regime needs to be carefully balanced to ensure effective compliance alongside minimising the burden and uncertainty for claimants.

Likelihood of substantial changes to the regime?

The R&D regime is seen as one of the central pillars to the government’s commitment to encourage an increase in R&D spending. Therefore, whilst its existence is likely to remain, this consultation indicates significant changes are on the horizon. It is important that those claimants who rely on the valuable funding provided by the regimes engage with the consultation process. 

Survey

We want to make the most of this opportunity to help to shape the design to be internationally competitive and well targeted for the long term.

We are collating your views on the current R&D regime and potential changes to make it more effective as an incentive for businesses to invest in R&D in the UK.

To share your thoughts via our survey, please email me at neil.muir@pwc.com.