Pace of R&D change ‘adding complexity’ for accountants

A ‘constant cycle’ of changes to the UK’s R&D tax credit system and a lack of long-term vision is creating uncertainty for businesses and placing strain on their advisers, according to Jenny Tragner, director and head of policy at R&D consultancy ForrestBrown.

Tragner argues that the absence of an R&D roadmap has been apparent since the Treasury’s March 2021 consultation on expanding the scope of reliefs and clamping down on abuse. Since then, it has manifested in a flurry of reactive and disproportionate policy changes, and has created uncertainty for businesses and advisers alike, she says.

“It’s definitely having an impact on accountants.” It’s starting to turn something that was historically a very positive discussion around incentives, deductions and value adding, into something that is more negative and based around reductions in benefits and a lack of certainty.”

‘Piecemeal change’

The past six months have proven especially chaotic for the UK’s R&D regime, beginning with Chancellor Jeremy Hunt’s inaugural Budget in November 2022 in which the deduction and credit rates for the SME scheme were slashed in attempt to improve compliance amid increasing reports of fraud and abuse. Meanwhile, the rate of relief for larger organisations was increased.

Just four months later in the 2023 Spring Budget, however, Hunt attempted to rebalance the rates. He partly restored losses incurred by SMEs in the Autumn Statement by introducing a new 27% rate of relief to apply from April 2023, providing that R&D activity makes up at least 40% of the firm’s total expenditure.

While Hunt claimed in his statement that the £1.8bn measure would benefit 20,000 “R&D intensive” companies and help turn Britain into a “science superpower”, Tragner argues that this represents more change, complexity and uncertainty for SMEs and their advisers.

“For accountants advising clients on their tax, it’s a change that’s going to affect quite a small proportion of SME R&D claims, but it’s a calculation that will need to be carried out for most of their clients to confirm which is the correct rate to apply to them.

“That’s extra work for accountants and advisers, and it also makes it harder for businesses to forecast what they might receive.”

Tragner is also critical of the lofty 40% threshold itself, joining numerous other dissenters in arguing that it is “incredibly high” and may encourage manipulating claims to qualify for the generous rate of relief.

“It only really applies to early-stage, pre-revenue, hugely R&D intensive businesses,” she says. “We’ve got a number of really exciting, young, innovative businesses who I look at and think those are the poster children for R&D, who will not hit that threshold. And they won’t even be particularly close.”

Confusion ‘erodes confidence’

In addition to the new R&D intensive threshold, April 2023 also saw the rollout of a measure preventing businesses from claiming relief on costs borne by UK companies for R&D conducted overseas – a move widely criticised for jeopardising the nation’s productivity and competitiveness in STEM fields.

But perhaps most controversially, the UK government is also currently formulating plans to merge the two existing R&D schemes (RDEC and SME), with a view to implement this as early as April 2024. The initiative has once again been met with considerable criticism, with an Azets survey of 42,000 SMEs finding that just 12.8% support the proposals in their current form.

This scepticism is echoed by Tragner, who argues that while a merged scheme could be beneficial, it “shouldn’t be at the expense of a lower rate of relief for SMES”.

“It makes good sense for SMEs to be offered a higher rate of relief,” she says. “We’re achieving different things with different incentives, so I think the merging of the rates of relief is short-sighted.”

Tragner argues that, above all, it’s the pace of change and persistent overlapping of new policies which is most detrimental for small businesses and their advisers. The long-term nature of many R&D projects means that consistent policy changes erode confidence in investment decisions, she says.

“We’ve had clients who sought our advice around the proposed legislation on overseas R&D, for example, only to discover that it was pushed back for a year.

“The confusion only does one thing, which is that it erodes confidence, and therefore limits business’ ability to invest in more R&D, which is precisely the opposite of what it’s designed to do.”

Getting back on track

Echoing the views of numerous market participants, a January report saw The House of Lords Economic Affairs Committee express its disapproval of the plans for a single R&D scheme.

“They’ve gone out to consultation, but all they’ve done this for is to ask how that should be done – they haven’t set up a consultation to say should it be done”, Lord Leigh of Hurley, chair of the Committee, told Accountancy Age at the time.

Similarly, Tragner argues that the government must work much more closely with stakeholders in consulting on current and future changes to the R&D regime.

“A lot of businesses have noted the really narrow focus they’ve been allowed to comment on. So not only would I like to see a roadmap published, but also a more much open-minded approach to consulting with businesses on what it should look like.”

This, she adds, will allow accountants to establish more certainty over the direction of R&D policy, and provide a higher-quality service to their SME clients as a result.

“Accountants see themselves as trusted advisors and want to differentiate the value they’re adding, which is often about looking forwards and helping businesses forecast and understand how those changes should impact their investment, and that’s incredibly difficult to do when there’s a lack of certainty over the policy direction.”