The Chancellor of the Exchequer
1 Horse Guards Road
June 2, 2021
By email: RDTaxReliefs@hmtreasury.gov.uk
R&D Tax Reliefs: consultation
Thank you for the opportunity to respond to the above consultation. Our comments follow.
Confluence Tax is an 11-year established tax advisory firm; the only such firm to provide advice to businesses and individuals specifically within the IP-rich technology and biotechnology industries, predominantly SMEs. Our expert team understands the industries’ complexities and trends and how they relate to the UK tax system as well as the international ramifications.
Confluence Tax has established excellent relationships with Government bodies, including HMRC and HM Treasury, as well as industry-specific organisations such as the BIA, enabling liaison with decision makers, and we have been involved in the many consultations and proposals affecting the life sciences sector. Confluence Tax is regularly requested to provide input to proposed tax changes, such as the 10-year review of R&D tax credits, R&D PAYE cap, the OECD-driven reform of the Patent Box and potential changes to capital gains tax, venture capital schemes, and EMI schemes.
The firm conducted a survey to unveil what our clients’ views were on the current R&D tax credit relief scheme1. The full survey results will be available shortly on our website www.confluencetax.com We have included some evidence from our clients’ responses in this consultation response.
Colin Hailey, Partner at Confluence Tax, chairs the UK BioIndustry Association’s Finance and Tax Committee. We agree with and support the BIA’s response to this consultation also.
- Is there a case for consolidating the two schemes into one? What do you value about the design of the current schemes that might be lost if they were unified?
Provided the value of the relief in cash refund terms is unchanged, we do not have strong opinions either way.
Experience has shown, however, that change can result in unintended consequences and/or delays in HMRC processing times. The accounting advantages of RDEC versus SME schemes are of little importance to our SME clients. Our clients are well versed in the two schemes and familiar with the need to split projects to be able to access both schemes in accordance with the rules.
- What do you think explains the difference in additionality between the two schemes? How could the schemes be improved to incentivise the R&D your business does or might consider doing? Can you give evidence to support your suggestions?
We are not convinced that there is a true difference in additionality. See our response to question 4.
- To what extent do the rates of relief available to you impact your investment decisions and/or your choice of location? Is the balance of relief between the two schemes appropriate? Is there any evidence of significant deadweight where investment decisions would proceed without relief?
We surveyed our client base about R&D Tax Credit reliefs and our respondents’ views indicated that nearly 40% may choose to relocate their business outside the UK, should the scheme be either removed or down-dialled. A further 24% would reduce the amount of investment in the UK.
There have been a number of US NASDAQ listings of R&D focussed UK companies over the last few years, and they continue. It is notable that almost exclusively these companies retain their UK operations and UK corporate structures, with a US subsidiary to house the required US staff. R&D tax credits, along with the patent box and the lack of withholding tax on dividends, are key tax reasons for this. We believe that the re-introduction of an IP ownership test would reinforce the benefit to the UK economy of these types of company.
- Would a departure from the ordinary Corporation Tax self-assessment system be justified? Should more information and assurance be required from companies at the point of claiming? Should a company providing more information upfront be treated differently?
We do not believe there is a need for departure unless it gives additional benefit. Our clients are confident they can justify both their basis for considering whether they conduct R&D and the numbers they include in their returns.
It was interesting to see that our client base in general (71% of respondents) would be prepared to give more information if it resulted in being able to claim more R&D relief, such is its value to these companies.
- When did you first claim, and what prompted you to do so? Do you use an agent? If so, why? What is your experience of how agents’ fees are structured? How could the expertise and specialist knowledge of agents assisting with R&D claims be improved?
In the Confluence Tax survey, we asked our clients about the contingent fee model of claiming R&D tax credits, and almost exclusively they said no they did not like the model. We hear from clients often that they choose a specialist tax consultancy firm over contingent fee providers.
It would be better to discourage the contingent fee model of claims, which encourages disingenuous R&D claims. This could be done using the existing DOTAS rules, increasing documentation requirements and having a better staffed and more focussed HMRC enquiry approach.
Below is a selection of comments received in response to this question, through our survey. The evidence speaks for itself insomuch as our clients – those that inhabit the innovative technology and biotechnology space – do not view contingent fee claims positively.
“When will HMG learn that overcomplicating the rules leads to ambiguity and opportunities for some to game the system. This is in no-one’s interest and shouldn’t be encouraged. Simplify everything and boost the size of the scheme.”
“These firms present a tax credit application as a risky endeavour like a legal claim rather than simply operation of the tax system.”
“Strong preference to pay a fee for service (time based) – I think that the contingent model incentivises advisors to overclaim for their clients.”
“At the end of the day, the claim is about factual matters and should not be capable of manipulation – contingent fees for advisors may result in increasing numbers of factually incorrect claims.”
“I’d like to pay a fee that’s agreed up front and fair for the work done by the claim firm regardless of the outcome of the claim.”
“I don’t use these – I calculate the claim myself and provide it to our Tax consultant to include in the Corporation Tax return.”
“I think this encourages the ‘stretching’ of claim boundaries.”
“I am capable of computing and submitting the claim – therefore, use of firms is a sense check rather than overall facilitator”
“These firms encourage bolstering claims and potential abuse.”
- How can the responsibilities of HMRC, agents and the company be better reflected in the claims process?
We are unsure as to what this question is asking. We believe our clients already understand the responsibilities of the parties.
- What other changes might help claims to be dealt with more smoothly, while ensuring better compliance? Is there a way HMRC and advisers can work more effectively to improve the quality of external advice available to companies? If you claim R&D tax reliefs in other countries, how does the claim process differ and what are your views on this?
Targeted enquiries on specific areas, not standard wide-ranging questions. Better training for tax inspectors. A willingness to attend meetings or video calls to resolve queries.
Other comments from our survey include:
“It could be made administratively easier for companies whose sole business is R&D (i.e. loss making companies backed by VC investment).”
“The variability of the delay between submission of the tax return and payment – this doesn’t help cash-flow predictions if we’re reliant on the income to keep things steady. ”
“The time delay between financial year end, statutory accounts finalisation and then R&D tax claim. A way of providing a payment on account or similar either in-year or in the quarter after financial year end would help cash flow rather than waiting for an all / nothing claim to be paid some 4-6 months after year end.”
“The quality and consistency of the assessment of R&D tax credit claims by HMRC can be quite random and dependent on which individual assessor the company gets.”
“For some smaller, start-up companies, perhaps being able to submit quarterly reclaims would help with cashflow and certainty of receiving the reclaim in forecasting.”
- Is there evidence to suggest areas of activity other than those currently covered by the R&D definition drive positive externalities which should be recognised by the tax system?
No. The R&D definition is broad for a reason and captures the true value that our clients create (but see comments on expanding cost categories in question 12). In the true sense of science and innovation, the definition must be broad to allow for failure and learnings from all R&D outcomes, to move science forward.
“The rules are basically clear (if a bit quirky in places) and the scheme does not seek to cherry pick specific fields of R&D.”
- Do you think R&D tax reliefs could better incentivise R&D with specific social value, for example developing green technology? Could R&D tax reliefs be used to disincentivise R&D in certain fields?
See answer to question 9.
- What is your experience of conducting R&D in different regions across the UK? How do R&D tax reliefs benefit these activities, and how could the offer be improved to better support these activities?
The ‘regional’ analysis, conducted by registered office postcode, included in the Treasury’s R&D consultation document bears no relation to reality in our view and is in fact misleading. Law firms and company formation agents typically use postcodes that are located in London and the South East.
The system is thankfully already blind to region and our client base is active in all four UK nations, with many companies operating from a number of locations. This is due to the need to bring in expertise wherever it is located (see also our reply on question 15). We believe that a regional approach to the reliefs will drive artificial structures. The focus for the future should be upon closing down avenues to fraudulent/abusive claims and structures.
- Are there any other areas of qualifying expenditure that should be included within the reliefs? How would this influence your investment decisions?
Below is a selection of answers from the survey.
“Would prefer being able to claim more broadly (e. g. cloud services). Exclusion of social sciences is a bit irritating”
“Widening and modernising the remit to capture spend on data/AI/machine learning would be helpful.”
- What proportion of your R&D expenditure is treated as capital for the purposes of corporation tax? What would be the impact on your R&D activities of increased relief for capital expenditure?
The proportion is difficult to determine as most spend is captured as Annual Investment Allowance, without the need to determine the R&D element.
Once the R&D site is built or capex incurred in the UK, this translates into increased focus on the UK as the key location, from which other functions arise. Note that capex is nearly always incurred in the UK – spend overseas would be made in non-UK group companies that do not claim credits.
- Do you currently claim RDAs? If not, why not? What do you like and/or dislike about RDAs?
See our response to question 13 above. The key drawback of RDAs for early-stage R&D focussed companies is that they only add to existing losses.
- How much of the activity in respect of which you claim R&D in the UK is undertaken outside of the company, and how much of that is not undertaken in the UK? What are the benefits and drawbacks of subcontracting, whether overseas or domestically? What are your commercial/other reasons for carrying out work overseas rather than in the UK?
The majority of respondents to our survey would not support a change to the R&D scheme that removed the ability to subcontract R&D work outside the UK. Early stage, R&D focussed companies by necessity place the work wherever the required expertise is available; in many situations this is outside the UK. Recruitment of appropriate subjects for clinical trials, for example, when developing a new drug, often needs to spread wider than the UK to attain enough suitable trial participants. Some specialist laboratories are only based outside the UK and without subcontracting out this lab work, the company cannot carry out its core business.
- How could the government distinguish between work that needs to take place abroad and which benefits the UK, and that which doesn’t?
See our response to question 15 above. We do not support making such a distinction. The re-introduction of an IP ownership test should ensure that ultimately the benefit of the R&D is captured in a UK tax paying company.
- How can we identify the supporting activities which are most valuable for R&D, while providing a clear boundary to assist companies in claiming and HMRC in administering?
See our response to question 8.
1 R&D Tax Reliefs: are they fit for purpose? A survey of biotechnology and technology companies, May 2021, Confluence Tax.
Colin Hailey, Partner
You can read the Government’s R&D consultation document here
If you’re interested in this you can read our response to the Government’s EMI consultation