Aim of article:
This article aims to consider the impact the new Labour government could have on the R&D tax relief scheme.
Following the change of government after 14 years of Conservative leadership, there has been widespread speculation surrounding how Labour may change the R&D scheme. Various stakeholders, including claimants, consultancy providers, and investors, have expressed curiosity. Although not directly mentioned in their manifesto, Labour's overall message suggests the R&D scheme is not set to undergo significant change, which should comfort businesses seeking to invest in R&D. In this article, we discuss the scheme's history and our predictions for its future.
History of the scheme
The R&D tax relief scheme was introduced by the Labour government in 2000 to encourage commercial growth and enable the UK to compete in global economic investment sphere. Since its inception, the scheme has undergone numerous changes, including those to the legislation, processes, and quantum obtainable by claimants.
Message of Stability
Labour has pledged to bring "stability" to the current economic environment, highlighting the recent macroeconomic shocks the UK has endured, including Brexit and COVID-19 as sources of instability. The R&D scheme has also faced volatility due to numerous changes announced in recent budgets. This has made R&D legislation increasingly difficult to navigate, leading to uncertainty and confusion for claimants.
Despite a change in government, the team comprising the Department of Science, Innovation, and Technology will remain in place, and only the head of this department will be replaced. With recent changes to the scheme, the department is likely to agree with the stability message to avoid further changes.
It is important to note that the changes (including the Merged Scheme from 1 April 2024) announced by the previous Conservative government will only be realised by the current Labour government, and the impacts will unfold as time progresses. Therefore, it will take time to effectively monitor the impact of the merged scheme before Labour can consider making further changes. Given the broader macroeconomic backdrop and the recent changes to the scheme, we are unlikely to see a significant shift in the existing framework under a Labour government, as this would directly oppose their promise of “stability”. Instead, Labour will likely prioritise thoroughly embedding the past changes to the scheme.
RCK’s Predictions
These are RCK’s predictions for what is to come for the R&D scheme with the new government:
1. A shift from the use of the DSIT guidelines
The government may consider more targeted reliefs instead of continuing to use the DSIT guidelines, which are purposefully generalised for all sectors carrying out innovative scientific and technological projects. The scheme could, therefore, be refocused towards more typically high-tech industries such as AI, quantum computing, and biotech.
R&D tax providers have already noted that under a Conservative government, claims in specific sectors have been targeted with enquiries to ensure compliance. In a press release titled ‘Labour’s Business Partnership for Growth', Labour stated its intent to evaluate the scheme's impact on a sector-by-sector basis, beginning with life sciences.
Refocusing R&D funding towards high-tech sectors would align with the existing innovation funding routes, such as the Future Fund and Innovate UK grants, which offer large amounts of grant funding to these high-tech sectors to enable the UK to stay ahead of the curve.
2. Increased regulation using the AIF to create digital data benchmarking models
In the short term, instead of Labour making direct changes to the core legislation, we would expect a Labour government to create a new regulatory innovation office to boost compliance and ensure proper use of the scheme.
Through transitioning to a more digital R&D claim submission process and by introducing the mandatory Additional Information Form (AIF), the government can leverage its standardised format to create digital data models. The AIF was introduced to give advance notice of an R&D claim. These digital data models could include statistics surrounding the amount companies claim, to gather data on a business’s qualifying expenditure using SIC codes. This will make it easier to benchmark the value of a company’s claim amount compared to its sector of operation and historical claim amount. Utilising this data will enable the easy flagging of claims that outlay the expected trend.
3. Closing of the tax gap
Pre-election, Labour discussed their invest-to-save plan, which pledges an additional £855 million to close the tax gap. Labour explained that they would do this by increasing the training provided to HMRC and onboarding more tax inspectors. However, to date, this has not been re-affirmed post-election.
Conclusion
We anticipate Labour fulfilling its promise to focus on stability. We suggest the scheme may shift to a new set of guidelines that refocus R&D tax relief towards more typically high-tech industries. In addition, the government could use the data collected to improve benchmarking capabilities regarding fraud and increase industry-based enquiries. Finally, we expect an increase in HMRC funding to be used for training and hiring additional inspectors.
In the short term, we do not anticipate any significant changes to the R&D tax credit scheme. The scheme is essential for the UK to stay competitive in the global economy and offers vital funding for SMEs and RDEC companies who are investing in innovation. We encourage companies to review their tax position and assess their eligibility to claim. At RCK, we self-regulate, so we have always been prepared for these changes; our in-house compliance function independently vets each claim we submit to HMRC as part of our due diligence to ensure compliance at every turn.
You can contact a member of the RCK team to learn more about the changes or to get help submitting a claim.
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