HMRC must keep its hands off R&D

There is little wonder that business sees it as something of a truism that even the best of government ideas inevitably crumble to dust under the dead weight of the bureaucracy employed to implement them.

Take the current fog of indecision surrounding research and development (R &D) tax credits. HM Revenue & Customs (HMRC) still has not handed down the tablets from the mountain following a prolonged period of consultation. Meanwhile, small to medium-sized enterprises (SMEs) wait to see if another hammer blow is about to fall.

The longer the wait, the more the expectation grows that enthusiasm for a crackdown on R&D relief is gathering momentum in the highest towers of the Treasury. What other inference can be drawn?

The tragedy is that encouraging UK companies to up their game in the field of research was one of the brighter initiatives to come out of Whitehall, given the country’s dismal record in R&D spending over several decades.

While the US, Japan and Europe lavished funds on their scientists, universities and innovative business thinkers, creating a research base that translated into hard-edged, competitive commerce, the UK languished in an official atmosphere of indifference.

Then the regime of R&D tax relief was established – under the chancellorship of Gordon Brown, it should be remembered – to encourage innovation and offer the opportunity for UK companies that carry out R&D activities to reduce their tax bill.

It meant that SMEs could deduct up to 175 per cent of qualifying expenditure on R&D activities when calculating their profit for tax purposes.

But then, little by little, new barriers were erected. The most recent was HMRC’s tougher line on rules stipulating where small companies must hold their intellectual property (IP) to qualify for relief. It said that SMEs must hold the IP and the R&D in the same company to prevent taxpayers’ money being spent on projects that might be taken abroad. Firms rightly argued this penalised them for following legal advice that they should separate IP and R &D activities for commercial reasons.

Now fears are growing that even harsher restrictions are in the pipeline. Some industry commentators believe HMRC is about to clamp down on relief on the production of prototypes that are sold to consumers, rather than being scrapped. It is also suggested that restrictions will be placed on claims made on staff time, on the grounds that no worker can spend all their time on research. This is patently ludicrous, since firms that are serious about research have full-time R&D staff.

These ideas are, of course, speculation but they did not arise from some accountant or analyst’s fevered imagination. At the very least, they will be up for discussion and, as such, are indicative of the chipping away at the original concept.

Perhaps it is understandable that, in an economy as indebted as ours, the tax authorities will be encouraged to squeeze and squeeze again. But even the most gimlet-eyed mandarin in the Treasury must realise that the bulk of tax comes from successful businesses – and that businesses are successful because they invest in R&D.

If HMRC really wants to maximise the tax base, making relief on research easier to obtain is the way to go. To cause further damage to research in this country could be tragically self-defeating.

Jeff Meek is managing partner of the Edinburgh office of chartered accountant French Duncan LLP