While the fundamental principles of the research and development (R&D) regime have remained relatively stable for many years, companies have been getting to grips with significant changes to specific rules in the last 12 months, and the regularly moving timetable as to when they'll be implemented.
The changes have included merging the existing R&D schemes, increased disclosure requirements, new requirements to notify the intention to claim, restrictions on overseas expenditure and amendments to the rules on ‘contracted out’ R&D. Additionally, HMRC enquiries into R&D claims have notably escalated.
The breadth and pace of these changes have sparked substantial debate. None of the main political parties have announced policies on significant changes to the regime during the next Parliament, a development likely to provide relief to many businesses struggling to keep pace with the changes. However, analysing the manifestos and other sources shed light on how the main political parties might review the incentive in the future.
The Conservative Government has been responsible for the aforementioned changes to the R&D tax regime. It's therefore unsurprising that their manifesto pledges to maintain R&D tax incentives over the next Parliament.
Although no specific changes to the regime are outlined, their manifesto emphasises an increase in public spending on R&D from £20 billion a year to £22 billion a year in 2024 and focuses on investment in large-scale computer clusters and advanced manufacturing in the automotive, aerospace, life sciences, and clean energy sectors. We would expect that the R&D regime will continue to play a part in these investment plans.
The Labour Party's manifesto doesn't directly mention R&D tax incentives. However, their business growth plans (published in early 2024) confirm that they'll maintain the current structure of the R&D regime over the next Parliament to maintain stability – noting that there have been five changes since the last general election in 2019. However, they also express a willingness to evaluate the impact of the scheme on a sector-by-sector basis, starting with life sciences. This suggests that they could look to make further changes to the regime in the medium to long term, despite giving some stability in the short-time.
In addition to this, they're also going to continue the crackdown on fraudulent claims and those made in error, which they suggest the sector-by-sector evaluations will help in identifying.
The plans also suggest that Labour will maintain the current support for the commercialisation of IP in the UK via the Patent Box.
The Liberal Democrats’ manifesto proposes boosting R&D investment to at least 3% GDP by 2030 and 3.5% of GDP by 2034. While specific details on achieving this target aren't provided, it's anticipated that the R&D tax regime will continue to play a significant role in realising these objectives.
Although not a specific point in their manifesto, they have previously published a call for the development of a new industrial strategy, which includes reestablishing the Industrial Strategy Council. This includes a specific point on setting up effective incentives for R&D investment and ensuring that the UK’s R&D framework is geared towards fostering innovation, especially among SMEs.
This reference to SMEs also links to a point in their manifesto about focusing on small businesses and startups. SMEs are likely to have been the most impacted by the introduction of the merged scheme, which is much closer to the previous rules for large companies and so requires a change in approach, and also the decrease in the rate of relief obtained for SME claims prior to that. Therefore, their comment around this could indicate a desire to shift the focus of the R&D incentive again.
Even without specific policy pledges around incentives the Conservatives, Labour, and Liberal Democrats all appear committed to encouraging research and development, and so it would seem that tax reliefs will be a key part of any strategy. The pledges of no immediate changes are likely to reassure many companies seeking stability in a period of uncertainty.
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