Out-Law News 2 min. read

‘Lacklustre’ R&D expenditure statistics a cause for concern, says tax expert

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The slight increase reported in the amount of money businesses are spending on research and development (R&D) in the UK is a cause for concern if the UK government is to meet its stated target of increasing total investment in R&D to 2.4% of GDP by 2027, a tax expert has said.

Penny Simmons of Pinsent Masons, the law firm behind Out-Law, was commenting after 2019 estimates of gross domestic expenditure on R&D were published by the Office for National Statistics (ONS). According to the ONS, R&D expenditure grew by just 0.02% to 1.74% of UK GDP in 2019.

The ONS said that expenditure on R&D undertaken in the UK increased by £1.3 billion (3.4%) to £38.5 billion in 2019. This was, however, the lowest percentage growth since 2013. The long-term growth trajectory of total R&D expenditure as a percentage of GDP was low, with an increase from 1.59% in 2008 and 1.72% in 2018.

Simmons said: “Boosting innovation and increasing investment in R&D is at the centre of the UK government’s post Covid-19 recovery strategy. At current projected growth rates, total investment in R&D would only reach 1.9% of GDP by 2027. Today’s figures will no doubt be a cause for concern and a shift in approach is needed to meet the government’s stated investment targets.”

“Significant focus should be given to how R&D tax reliefs can be used to further encourage and incentivise R&D investment. The recent consultation into the government’s review into R&D tax reliefs did not contain any clear proposals for reform and it is hoped that today’s lacklustre statistics provide further impetus for the government to ensure that any reforms do not unintentionally discourage R&D investment,” she said.

The government is currently reviewing the R&D tax relief system to ensure that the “UK remains a competitive location for cutting edge research, that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted”. Details of the wide-ranging review are contained in a consultation paper that was published in March. Broadly, the scope of the review is to consider whether to:  expand the definition of R&D; continue to maintain two separate relief systems for larger and smaller businesses; introduce changes to how the system is administered; and introduce territoriality requirements to make the reliefs more targeted.

Simmons said: “Some of the possible routes for reform could prove problematic for life sciences businesses and other R&D-intensive sectors, giving rise to unintended consequences. The need to safeguard and increase access to relief for small and medium sized enterprises (SMEs) should be considered paramount. The UK life sciences sector invests more in R&D than any other UK sector and given that 82% of the current 6300 UK life sciences businesses are categorised as SMEs any proposals that could affect accessibility of tax relief for SMEs will cause concern.”

“Restricting the ability of SMEs to subcontract R&D, whilst remaining eligible for tax relief would be problematic. SMEs are currently able to claim tax relief where R&D activity is subcontracted to another entity. This can be vital to small start-ups, particularly in the life sciences sector that may not have the resources and sufficient finance to conduct the R&D itself. The introduction of territoriality restrictions on R&D tax reliefs would also be concerning to the life sciences sector. UK life sciences businesses routinely engage in overseas research initiatives and clinical trials to inform the development of new medicines. If tax relief is unavailable for expenditure on these activities, some life sciences innovation may be too costly to progress. The outcome of the review into R&D tax credits across the life sciences and other R&D intensive sectors is now eagerly awaited.” Simmons said.

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