Slow Growth of R&D Expenditure Raises Stakes of Government Consultation

Slow Growth of R&D ExpenditureA recent Office of National Statistics (ONS) report revealed that rate of growth of R&D expenditure in the UK slowed in 2019 to its lowest rate recorded in almost a decade. R&D expenditure which is incentivised by the R&D Tax Credits scheme, Innovate UK grants and other schemes, grew by just 3% in 2019 in comparison to 7% the previous year and an average of 6% across the previous 6 years.

This can be seen as a potential setback to the government’s target to “to raise total investment in research and development to 2.4% of UK GDP by 2027”. This target was reaffirmed in the R&D Tax Reliefs Consultation that was announced in the Spring 2021 Budget Address. The R&D expenditure in 2019 was around 1.7% of that year’s GDP.

Whether this is just a short-term anomaly or a sign of longer-term stagnation in growth remains to be seen although the uncertainty felt over Brexit and the effects of Covid on the economy in 2020 and 2021 is unlikely to help matters. Many companies may be inclined to focus on their core activities and shorter-term goals (such as customer retention or minimising losses) rather than investing in innovative projects which they may be perceive to only benefit them in the medium to long term.

This brings the government’s R&D Tax Relief Consultation back into focus. There is no doubt that the government will be looking to use innovation as one of the main levers to speed up economic recovery from the UK’s dramatic 9.9% drop in GDP in 2020, and post-Brexit, the need to attract inward investment from R&D-intensive multinationals has never been higher.

However, it remains unclear exactly how this will influence the results of the consultation and what mechanics will be used to bring R&D expenditure up to previous levels. The questions in the consultation suggest that some strategies under consideration include:

  • Widening the scope of allowable expenditure to include data and cloud costs
  • Allowing some forms capital expenditure to be included in claims (such as plant and machinery costs)
  • Widening the definitions of what is currently considered ‘R&D for tax purposes’

As we previously reported, the consultation document also suggests that widening the scope of the scheme in some areas will be considered alongside limiting it in others:

“While the government sees the case for expanding the scope of qualifying expenditures, it seeks to do so in a way that emphasises effectiveness for the taxpayer. It is therefore important that, as well as identifying improvements in the schemes that could incur additional Exchequer costs, areas where reliefs are less well-targeted are identified also.”

This ties into a 2019 report by the ONS that identified low quality R&D claims as the “main cause for lost tax” in the UK. In fact, in the consultation document, the government acknowledges that previously a lack of resources did not allow for a review process of R&D claims that was thorough enough. It follows that as part of this consultation the government will explore ways to ‘weed out’ claims that do not contain enough evidence of genuine innovation. Read more about this topic here.

Now that we have confirmation that R&D expenditure is slowing down, this brings an extra sense of urgency to proceedings. We will be keeping a close eye on whether the government is in a saving or spending mood when it comes to the R&D scheme and what areas they will choose to focus on. To hear about further developments on this topic subscribe to our newsletter below.