3rd Report - Research and development tax relief and expenditure credit

The government's response

What the committee recommended 56

1. 1
   R&D makes an important contribution to the UK’s economy, and we agree that it is... Conclusion · paragraph 40
2. 2
   R&D relief is seen by business as an important element for supporting and promoting R&D... Conclusion · paragraph 41
3. 3
   It is right that, taking account of the rising cost of the schemes, the Government... Conclusion · paragraph 42
4. 4
   We are concerned at the evidence of how the cost of fraud and error has... Conclusion · paragraph 43
5. 5
   HMRC should address the criticisms witnesses made of the way its compliance activities are conducted. Conclusion · paragraph 62

See all 56 recommendations and conclusions

Sources

• 3rd Report - Research and development tax relief and expenditure credit ↗The committee's report, parliament.uk
• Government response to the Research and Development Tax Relief and Expenditure Credit report ↗The government's response, 13 April 2023, parliament.uk

Recommendations and conclusions 56

1. 1
   R&D makes an important contribution to the UK’s economy, and we agree that it is... Conclusion · paragraph 40 Conclusion (the committee's words)

   R&D makes an important contribution to the UK’s economy, and we agree that it is right for the Government to support it. We welcome the Government’s commitment to continuing R&D relief.
2. 2
   R&D relief is seen by business as an important element for supporting and promoting R&D... Conclusion · paragraph 41 Conclusion (the committee's words)

   R&D relief is seen by business as an important element for supporting and promoting R&D activity in the UK. HMRC data indicates that the reliefs do promote spending on R&D although the return on the SME relief is disappointing.
3. 3
   It is right that, taking account of the rising cost of the schemes, the Government... Conclusion · paragraph 42 Conclusion (the committee's words)

   It is right that, taking account of the rising cost of the schemes, the Government keeps them under review and ensures that they not only meet the needs of the modern economy but also represent value for money for the taxpayer.
4. 4
   We are concerned at the evidence of how the cost of fraud and error has... Conclusion · paragraph 43 Conclusion (the committee's words)

   We are concerned at the evidence of how the cost of fraud and error has increased. We note that the Government sees the rebalancing of the reliefs it announced at the Autumn Statement 2022 as a means of reducing the number of spurious claims.
5. 5
   HMRC should address the criticisms witnesses made of the way its compliance activities are conducted. Conclusion · paragraph 62 Conclusion (the committee's words)

   HMRC should address the criticisms witnesses made of the way its compliance activities are conducted. These included an inconsistency of approach, failing to take account of information already received from claimants when making enquiries, poorly focused questions and a reluctance to engage constructively with taxpayers and their agents.
6. 6
   Witnesses considered that HMRC is not sufficiently resourced for its current compliance activities in relation... Conclusion · paragraph 63 Conclusion (the committee's words)

   Witnesses considered that HMRC is not sufficiently resourced for its current compliance activities in relation to R&D claims. The new legislation may put greater pressure on resources if HMRC is to use the additional information it will generate effectively. This is a matter both of the amount of resource available and its quality.
7. 7
   While we note that the Minister responsible believes that the current resources are adequate for... Recommendation · paragraph 64 Recommendation (the committee's words)

   While we note that the Minister responsible believes that the current resources are adequate for dealing with R&D relief, we recommend that the Government keeps the resource available to HMRC for dealing with R&D relief under review. If it is insufficient to combat the abuse of R&D relief effectively, the Government should consider whether additional resources can be made available within HMRC and, if necessary, provide additional resource.
8. 8
   HMRC’s Charter requires HMRC to ensure that officers dealing with a taxpayer have the right... Recommendation · paragraph 65 Recommendation (the committee's words)

   HMRC’s Charter requires HMRC to ensure that officers dealing with a taxpayer have the right level of expertise, but our evidence suggests that this is not always the case in relation to R&D relief. We recommend that HMRC review its current training programme for its R&D teams to ensure it is providing officers with the skills and knowledge they need to work effectively and appropriately with businesses on R&D relief.
9. 9
   We accept that, in principle, the proposed new requirements for R&D claims should help HMRC... Conclusion · paragraph 81 Conclusion (the committee's words)

   We accept that, in principle, the proposed new requirements for R&D claims should help HMRC to counter abuse, mainly by providing more information about the claims and the advisers who prepare them. This should enable HMRC to make a more effective risk assessment of which claims to investigate.
10. 10
    We agree with witnesses that the new rules will only be successful in improving risk... Recommendation · paragraph 82 Recommendation (the committee's words)

    We agree with witnesses that the new rules will only be successful in improving risk assessment if HMRC uses the new information it will receive timeously and effectively. We are concerned that it may not be sufficiently resourced to do this. The Government must ensure that adequate resources are in place within HMRC’s R&D teams, otherwise the policy objective of the new rules may not be achieved.
11. 11
    We recommend that HMRC monitors whether compliance with the requirement for a senior officer of... Recommendation · paragraph 83 Recommendation (the committee's words)

    We recommend that HMRC monitors whether compliance with the requirement for a senior officer of a company to endorse an R&D claim, as well as the company’s own tax return, achieves the policy aim of this measure. If it proves necessary, HMRC should consider what other options might be available to ensure senior officers of companies take appropriate responsibility for claims.
12. 12
    The new requirements increase the compliance burden on all claimants, including those meeting their obligations... Conclusion · paragraph 84 Conclusion (the committee's words)

    The new requirements increase the compliance burden on all claimants, including those meeting their obligations and making genuine claims. In the case of most of the requirements, we consider that this strikes a reasonable balance, taking account of the benefit of equipping HMRC to combat abuse more effectively.
13. 13
    The requirement for pre-notification of claims, however, appears to be uniquely onerous, without any direct... Conclusion · paragraph 85 Conclusion (the committee's words)

    The requirement for pre-notification of claims, however, appears to be uniquely onerous, without any direct precedent within the tax system. It risks companies being unable to make legitimate claims, while its benefits in countering abuse are questionable.
14. 14
    We recommend that the requirement that companies give notice of claims within six months after... Recommendation · paragraph 86 Recommendation (the committee's words)

    We recommend that the requirement that companies give notice of claims within six months after the end of their accounting period is dropped from the draft Finance Bill 2022–23 before it is introduced into Parliament.
15. 15
    It is disappointing that secondary legislation setting out the detail of the new compliance measures... Conclusion · paragraph 90 Conclusion (the committee's words)

    It is disappointing that secondary legislation setting out the detail of the new compliance measures has not yet been published in draft given the proximity of the rules taking effect. Draft regulations should be published as soon as possible to give businesses adequate time to prepare for implementation in April.
16. 16
    Draft guidance has been published and this is welcome. Conclusion · paragraph 91 Conclusion (the committee's words)

    Draft guidance has been published and this is welcome. However, while we commend HMRC for a consulting on the draft guidance, we note that since the consultation period continues until the end of February, it will be March at the very earliest before a final version can become available. This would only be shortly before the new rules take effect from 1 April. In the meantime there remains an element of uncertainty—indeed the draft guidance specifically states that no action should be taken based on it. It is not clear to us why it has taken HMRC five months from the publication of the draft Finance Bill in July 2022 to draft and publish less than 10 pages of guidance.
17. 17
    We consider that the issue of who should be able to advise on R&D claims... Conclusion · paragraph 95 Conclusion (the committee's words)

    We consider that the issue of who should be able to advise on R&D claims is part of the wider consideration of the regulation of tax advice, which the Government is pursuing separately. We therefore consider that this is outside the scope of this inquiry.
18. 18
    For R&D relief to work as an incentive of R&D activity, businesses need to know... Conclusion · paragraph 108 Conclusion (the committee's words)

    For R&D relief to work as an incentive of R&D activity, businesses need to know not only that it exists, but what it covers. The Government needs to ensure that SMEs have access to information about R&D relief. This information should be clear, accurate and simple to understand so that SMEs can easily identify whether R&D relief is relevant to what they do and, if it is, work out what steps they need to take to claim it. We agree with our witnesses that the Government needs to take control of the narrative of what qualifies as eligible R&D.
19. 19
    We recommend that, as a minimum, HMRC and BEIS work together on a new awareness... Recommendation · paragraph 109 Recommendation (the committee's words)

    We recommend that, as a minimum, HMRC and BEIS work together on a new awareness campaign aimed at providing SMEs with accurate information about what is, and as importantly, what is not R&D.
20. 20
    We are concerned at the disconnect between what HMRC describes as a straightforward process for... Conclusion · paragraph 119 Conclusion (the committee's words)

    We are concerned at the disconnect between what HMRC describes as a straightforward process for claiming R&D relief and what our witnesses told us about the perceived complexity of this process.
21. 21
    We recommend that HMRC work with stakeholders, for example, through its Research and Development Communication... Recommendation · paragraph 120 Recommendation (the committee's words)

    We recommend that HMRC work with stakeholders, for example, through its Research and Development Communication Forum, to understand better the concerns raised with us relating to the complexity of R&D reliefs and try to identify solutions.
22. 22
    Businesses should feel that they are able to claim R&D relief themselves without needing an... Recommendation · paragraph 121 Recommendation (the committee's words)

    Businesses should feel that they are able to claim R&D relief themselves without needing an agent. The Government should work with small business organisations to identify the changes needed to the claims process and related guidance to give smaller businesses the confidence to do it themselves.
23. 23
    We welcome the work that HMRC is doing to develop a new methodology which will... Conclusion · paragraph 126 Conclusion (the committee's words)

    We welcome the work that HMRC is doing to develop a new methodology which will enable it to distinguish between error and fraud. We would like to see the results of the random sampling exercise when these are available.
24. 24
    Error and fraud are two different things. Conclusion · paragraph 135 Conclusion (the committee's words)

    Error and fraud are two different things. We are concerned that, although the draft Finance Bill 2022–23 measures are said to be directed at helping to reduce error, they have primarily been aimed at tackling the increasing number of spurious claims. HMRC needs to enhance its education and support to taxpayers to help them understand the scheme better and avoid errors.
25. 25
    While we understand the reasons why HMRC has adopted the “process now, check later” approach,... Conclusion · paragraph 136 Conclusion (the committee's words)

    While we understand the reasons why HMRC has adopted the “process now, check later” approach, we consider that it may not be sufficiently clear to claimants that giving relief in response to a claim does not mean that HMRC has accepted it as valid. There remains a possibility that action may be taken to recover the relief if later checks show that the claim did not meet the requirements for R&D relief.
26. 26
    We recommend that when relief is given it is accompanied by a warning about the... Recommendation · paragraph 137 Recommendation (the committee's words)

    We recommend that when relief is given it is accompanied by a warning about the possibility of later recovery.
27. 27
    We agree with our witnesses that the BEIS Guidelines, which explain the meaning of R&D,... Conclusion · paragraph 143 Conclusion (the committee's words)

    We agree with our witnesses that the BEIS Guidelines, which explain the meaning of R&D, are in need of updating. It is not appropriate that a document intended to explain innovation has not been revised since 2010.
28. 28
    We recommend that, in updating the BEIS Guidelines, BEIS works with HMRC to agree additional... Recommendation · paragraph 144 Recommendation (the committee's words)

    We recommend that, in updating the BEIS Guidelines, BEIS works with HMRC to agree additional “real-world” examples, particularly in relation to R&D within the digital and technology sectors, for inclusion in revised Guidelines.
29. 29
    We recommend that BEIS commit to reviewing its Guidelines at least every five years. Recommendation · paragraph 145 Recommendation (the committee's words)

    We recommend that BEIS commit to reviewing its Guidelines at least every five years.
30. 30
    We welcome confirmation from HMRC that it plans to undertake a comprehensive review of its... Conclusion · paragraph 154 Conclusion (the committee's words)

    We welcome confirmation from HMRC that it plans to undertake a comprehensive review of its published guidance covering R&D tax relief, as set out in its CIRD Manual, to make it more accessible and user-friendly.
31. 31
    We recommend that, in embarking on this review, HMRC consults with representative bodies from accountancy,... Recommendation · paragraph 155 Recommendation (the committee's words)

    We recommend that, in embarking on this review, HMRC consults with representative bodies from accountancy, tax, and business, and works with them to improve the accuracy and user-friendliness of its published guidance on R&D relief.
32. 32
    We agree with our witnesses that HMRC’s CIRD Manual is not an ideal resource for... Recommendation · paragraph 156 Recommendation (the committee's words)

    We agree with our witnesses that HMRC’s CIRD Manual is not an ideal resource for SMEs considering whether to claim R&D relief. We recommend that HMRC, as a minimum, updates its 2016 guide for SMEs to provide SMEs with helpful information about how the relief works.
33. 33
    We are concerned about the uncertainty that has arisen as to the meaning of “subsidised... Conclusion · paragraph 157 Conclusion (the committee's words)

    We are concerned about the uncertainty that has arisen as to the meaning of “subsidised expenditure” following the decision in the Quinn (London) Limited tribunal case. HMRC should consider what steps it can take to help resolve this uncertainty and address the concerns raised with us in evidence.
34. 34
    We recommend that HMRC re-launch the Advance Assurance Process for SMEs. Recommendation · paragraph 164 Recommendation (the committee's words)

    We recommend that HMRC re-launch the Advance Assurance Process for SMEs. We consider that providing a means for a business to obtain certainty as to whether its claim is eligible should be an essential part of the overall R&D scheme.
35. 35
    We recommend that HMRC revisit the conditions for being able to apply under the Advance... Recommendation · paragraph 165 Recommendation (the committee's words)

    We recommend that HMRC revisit the conditions for being able to apply under the Advance Assurance Process, and in particular, remove the requirement that a company cannot have used the process before.
36. 36
    We can see merit in extending the Advance Assurance Scheme to claims for RDEC. Conclusion · paragraph 166 Conclusion (the committee's words)

    We can see merit in extending the Advance Assurance Scheme to claims for RDEC. HMRC should therefore publish its report on the success, or otherwise, of its pilot RDEC assurance scheme no later than Spring Budget 2023. It should also confirm whether or not a permanent RDEC assurance scheme for all companies, regardless of size, will be introduced.
37. 37
    We were concerned to learn that HMRC was perceived as adopting a confrontational approach to... Conclusion · paragraph 179 Conclusion (the committee's words)

    We were concerned to learn that HMRC was perceived as adopting a confrontational approach to R&D claimants. We agree with our witnesses that a confrontational approach could lead to companies, particularly those smaller companies new to the relief, giving up on future claims. The Charter requirement that HMRC deal with taxpayers fairly should underpin its work in R&D relief cases as much as other areas of HMRC’s work.
38. 38
    We are concerned about the evidence we heard that suggested HMRC staff dealing with R&D... Conclusion · paragraph 180 Conclusion (the committee's words)

    We are concerned about the evidence we heard that suggested HMRC staff dealing with R&D claims are not sufficiently knowledgeable to assess what qualifies as R&D, and are therefore not well equipped to help claimants in this respect.
39. 39
    We recommend that HMRC liaise with BEIS to consider how it can enhance its access... Recommendation · paragraph 181 Recommendation (the committee's words)

    We recommend that HMRC liaise with BEIS to consider how it can enhance its access to scientific expertise when assessing whether a particular activity represents an advance in science or technology.
40. 40
    We welcome the Government’s proposal to include pure mathematics within the scope of the definition... Conclusion · paragraph 190 Conclusion (the committee's words)

    We welcome the Government’s proposal to include pure mathematics within the scope of the definition of R&D. We also welcome the expansion to the definition of qualifying expenditures to include data licensing and cloud computing costs. As both of these changes to R&D relief will help to ensure R&D relief reflects modern R&D activity, we believe that they will help the UK to remain a competitive location for R&D.
41. 41
    We agree with our witnesses, however, that these changes fall short of a wholesale review... Conclusion · paragraph 191 Conclusion (the committee's words)

    We agree with our witnesses, however, that these changes fall short of a wholesale review of the definition of R&D and qualifying expenditure.
42. 42
    For R&D relief to be effective, it must be able to keep up with the... Conclusion · paragraph 192 Conclusion (the committee's words)

    For R&D relief to be effective, it must be able to keep up with the pace of scientific and technological developments. We are concerned at the time it has taken for these changes, some of which were originally consulted on in 2020, to be introduced.
43. 43
    Our witnesses are clear that the changes to the definition of R&D cannot be fully... Conclusion · paragraph 203 Conclusion (the committee's words)

    Our witnesses are clear that the changes to the definition of R&D cannot be fully understood without guidance on how the new rules are to be interpreted, with examples showing how they apply in practice. We acknowledge the concerns of witnesses that these provisions may be interpreted in an overly restrictive manner and so limit their usefulness and, as a result, their value.
44. 44
    We recommend that when the draft guidance, published on 20 December 2022, is finalised to... Recommendation · paragraph 204 Recommendation (the committee's words)

    We recommend that when the draft guidance, published on 20 December 2022, is finalised to take account of comments received during consultation, additional examples are added to aid understanding of how the new rules will apply.
45. 45
    We recommend that the Government should use the consultation period on the draft guidance to... Recommendation · paragraph 205 Recommendation (the committee's words)

    We recommend that the Government should use the consultation period on the draft guidance to ensure that HMRC’s interpretation does not inadvertently result in the changes being less useful than intended.
46. 46
    While the draft guidance is welcome it is very limited in both length and detail. Conclusion · paragraph 211 Conclusion (the committee's words)

    While the draft guidance is welcome it is very limited in both length and detail. Again, we consider that more examples would help and that those examples should be ones to which businesses can readily relate. We note that the example given that the location of a volcano can be a legitimate reason for R&D to be carried out abroad is extremely unlikely to be useful to many businesses.
47. 47
    We recommend that when the guidance is revised after the consultation period more examples are... Recommendation · paragraph 212 Recommendation (the committee's words)

    We recommend that when the guidance is revised after the consultation period more examples are included.
48. 48
    We understand that the Government believes it cannot justify giving unrestricted relief for R&D expenditure... Conclusion · paragraph 222 Conclusion (the committee's words)

    We understand that the Government believes it cannot justify giving unrestricted relief for R&D expenditure overseas. However, if it also hoped to bring more R&D activity currently offshore into the UK, the evidence we received suggests that the proposed restriction may not be successful in this respect, at least in the short term. Witnesses suggested that it could even result in some R&D activities which currently take place in the UK being relocated to other countries. We also acknowledge the concerns of our witnesses related to the shortage of some specialised skills in the UK, and the nature of timescales involved in R&D projects.
49. 49
    We recommend that the Government considers introducing some form of transitional relief for expenditure on... Recommendation · paragraph 223 Recommendation (the committee's words)

    We recommend that the Government considers introducing some form of transitional relief for expenditure on specialised resource which is not available in the UK, especially for contracts already entered into. This would give companies time to adjust to the new rules.
50. 50
    We welcome the Government’s confirmation that its review of R&D reliefs is ongoing and that... Conclusion · paragraph 255 Conclusion (the committee's words)

    We welcome the Government’s confirmation that its review of R&D reliefs is ongoing and that the draft Finance Bill 2022–23 changes are only initial measures. Our witnesses were clear that, after over 20 years, a wide-ranging review of the reliefs is needed. We agree that the R&D review (HM Treasury’s R&D Tax Reliefs Report), published in November 2021, has fallen short of that.
51. 51
    We recommend that, no later than the Spring 2023 Budget, the Government should publish an... Recommendation · paragraph 256 Recommendation (the committee's words)

    We recommend that, no later than the Spring 2023 Budget, the Government should publish an outline of the areas that it is considering as part of the ongoing review, with an indicative timeline for consultation with stakeholders. The value of R&D relief to many businesses means that the Government needs to be as transparent as possible as to the changes it is considering.
52. 52
    Many of the suggestions for changes to the R&D schemes by witnesses would have been... Conclusion · paragraph 257 Conclusion (the committee's words)

    Many of the suggestions for changes to the R&D schemes by witnesses would have been raised with the Government in responses to its March 2021 consultation on R&D relief. Although the Government has as yet to provide details of what the next stage of the review will cover, in our view it needs to include consideration of the issues raised with us around the definitions of R&D and qualifying expenditure, and linking R&D relief more closely to Government priorities. However, we acknowledge that changes to the definition of R&D for tax purposes or to categories of expenditure eligible for relief would be more likely to result in additional Exchequer cost. This will need to be balanced against the economic benefits that should follow from any such changes.
53. 53
    The Government should continue to look for further ways in which R&D relief could be... Recommendation · paragraph 258 Recommendation (the committee's words)

    The Government should continue to look for further ways in which R&D relief could be improved, in particular to ensure the relief is able to adapt rapidly to changing technology. In this, the Government should be open to learning from the experience of other countries.
54. 54
    Whilst we agree that new-to-firm innovation has an important role into play in improving the... Conclusion · paragraph 259 Conclusion (the committee's words)

    Whilst we agree that new-to-firm innovation has an important role into play in improving the UK’s productivity, we consider that including new -to-firm innovation with the existing R&D scheme would fundamentally alter the character of the relief as well as increasing its cost significantly. We therefore could not support a change of this nature at this time.
55. 55
    We accept that the two R&D schemes are now close in generosity but they differ... Conclusion · paragraph 260 Conclusion (the committee's words)

    We accept that the two R&D schemes are now close in generosity but they differ in other respects, and it is clear that there are different views on whether the two R&D relief schemes should merge into a single RDEC-for-all scheme. In particular, SMEs value some aspects of the SME scheme which could be lost if this were the outcome. While we acknowledge that the Government has said that no final decision has yet been made on merging the two existing R&D tax relief schemes into a single RDEC for all scheme, we are disappointed that the consultation on a possible merger has been limited to design and implementation only. This is because it is imperative that the views of those who would be affected by such a change, particularly smaller businesses for which the existing relief provides essential support for their R&D activity, are fully taken into account in determining the “if” as well as the “how”.
56. 56
    We recommend that, in taking other aspects of the R&D review forward, the Government should... Recommendation · paragraph 261 Recommendation (the committee's words)

    We recommend that, in taking other aspects of the R&D review forward, the Government should hold a more open-ended consultation on possible changes to how R&D relief works in the UK. It should invite stakeholders to provide suggestions for change rather than looking for responses to pre-determined proposals.