The UK’s research and development (R&D) tax relief system helps encourage advancements in many different industries and disciplines. Billions of pounds’ worth of claims are approved each year, providing vital support to companies that have invested in innovation. But it’s not enough, according to measures of R&D as a percentage of GDP.
In a report urging the government to improve the R&D tax relief system, the Coalition for a Digital Economy (Coadec) claims spending has been flat, hovering between 1.66% and 1.69% of GDP since 2014. The government’s target is 2.4% by 2027. This puts the UK 19th out of 36 OECD countries, while Germany and Denmark exceed their own targets of 3% of GDP.
Coadec has set out a series of steps it believes can help reform the R&D tax relief system and encourage more start-ups in particular to achieve the scientific and technological advancements that could stimulate all areas of the economy.
Expanding the criteria
According to Coadec’s research, R&D tax credits were “very important” to the early-stage survival and growth of nearly 70% of the start-ups who received them. But the same percentage found the process difficult to navigate, which means support from reliable experts is often essential to successful applications.
Along with the complex process, start-ups found the criteria to be prohibitive, with Coadec suggesting definitions and guidelines are out of date and fail to recognise the realities of research in a digital age.
As a result, the report says, “the criteria for expenditure is relatively narrow” and missed opportunities are rife. Some of the costs associated with the early stages of creating a new product that do not qualify include:
– Market and feasibility research;
– Pre-production design;
– Patents and other intellectual property protection;
– Industrial upscaling.
One change the government has proposed is a cap on the SME scheme, with the aim of deterring fraudulent claims. A consultation is underway to determine how the impact on genuine companies can be kept to a minimum, but Coadec warns the proposals carry “a great deal of risk”. Instead, the organisation has proposed a series of changes under two main criteria, which it believes will support and stimulate the innovation needed to reach targets over the next few years.
The first area is designed to address the feeling that existing criteria do not reflect the modern realities of companies seeking technological advancements. Split into three specific recommendations, the proposals to improve policy are:
1. Allow the purchase of data sets for tech development
This move would reflect the integral nature of data in many tech companies’ R&D efforts. Data sets are not currently classed as consumables, but they are at the heart of cutting-edge businesses, training AI or machine-learning algorithms. Coadec notes other countries such as Denmark and South Korea already include data in their versions of the tax credit scheme and the UK is at risk of falling behind.
2. Allow the full inclusion of cloud services costs
Coadec’s research identified inconsistencies in how cloud services are treated in applications. But 68% of start-ups see these services as critical to the development process, with the overwhelming majority of tech firms using the cloud to handle and store data as well as train new algorithms.
3. Allow full claims for UI/UX development work
Innovative solutions for the front end make products viable. User interface and user experience work depends on R&D, yet firms are not able to claim for these costs under the current criteria. UI and UX is considered a vital part of the process by 82% of companies, so reflecting the importance of these efforts could encourage innovation and growth throughout the tech sector.
The other major area to tackle is the administrative aspect of the R&D tax relief scheme, with the need for HMRC to maintain expertise being chief among the concerns. Technology moves quickly and with it the perception of innovation shifts. Assessors with a high degree of technological expertise are better placed to understand what constitutes advancement and help protect the integrity of the system.
This expertise is also likely to help with Coadec’s recommendation for more proactive promotion of the scheme, as the current knowledge gap is significant. A campaign to highlight the benefits and explain the process to companies early in their development may help foster a culture of innovation and increase investment in R&D across the board. Finally, the organisation suggests a clearer, more detailed system of feedback is required.
In R&D Tax Shop’s own experience, HMRC feedback is detailed, constructive and offered in good faith. But Coadec’s research found some companies have faced uncertainty over why claims were rejected, so it recommends devoting enough resources to ensure clarity and certainty.
Maximise the potential
Whatever changes are ultimately made to the R&D tax credits scheme, it is crucial that companies engaging in innovative research and achieving advancements in their field maximise the potential relief available to them. Detailed records of the costs associated with R&D can be critical to successful claims and seeking advice on what is likely to qualify helps save a lot of time and effort.
With 70% of start-ups telling Coadec the tax relief scheme was crucial to their survival and growth, awareness of the system could make all the difference to the success of innovative companies. R&D Tax Shop can help identify qualifying costs and submit claims on your behalf, so contact us today to discuss how we can help you make the most of the support available.