R&D: does it pass the ER tax relief test?

This might be a somewhat contrary view of R&D tax relief

Over the weekend I read a comment that R&D tax relief should be expanded to help kickstart the economy.

Should it?

Last year we saw the anticipated butchering of one of tax’s sacred cows – in other words. Entrepreneurs’ Relief. 

This was because it was seen as expensive and, it was argued, was far from the front of a business owner’s mind when he or she were establishing the business meaning it couldn’t be seen as an incentive.

R&D relief is now top dog. Or, if I avoid mixing metaphors, top cow.

Broadly, where a SME incurs expenditure on qualifying R&D, it can receive up to 230% tax relief. There is a separate regime for large companies.

It is of course difficult to criticise R&D. It makes us all warm and fuzzy inside. Like kicking a cute little baby cow.

But if one looks at the same metrics applied to ER, then R&D relief does not shape up well.

Recent statistics show that the current cost is about £4.3bn a year – quite a bit more than ER. Further, £1.8bn of this went to large companies rather than SMEs. 

Secondly, I am certain that, in many cases, the availability of relief is not a prime mover in the SME investing in innovation. It would have done so anyway.

I think this can be seen from the number of SME’s that remain largely unaware of the regime and the undoubted fact that many claims are in respect of expenditure that the average person might consider R&D. 

Of course, the test is not what the man or woman on the London omnibus might think is R&D, but it does seem clear that some claims being submitted are a bit thin.

Finally, I suspect the Government probably also struggles to grapple with the fact that a significant proportion of relief leaks into the hands of claims companies charging contingent fees. 

We have seen some tightening of the R&D purse strings more recently. But for now, R&D still seems to represent a good political message and I cannot really see any material changes any time soon. 

However, Entrepreneurs’ Relief might be left feeling it has been held to a higher standard!

If you have any queries about R&D tax relief, or tax matters in general, then please do not hesitate to get in touch.