Tech-ing the Mickey?

Introduction

 

Across the centuries, Britain has rightly had a reputation for innovation.

 

From seed drills to spinning jennies, jet engines to…err… lava lamps, the country has certainly had its fair share of technological world firsts.

 

This ability to turn so-called ‘lightbulb moments’ into desirable, useful and profitable commodities has also turned inventors and entrepreneurs into celebrities courted by politicians eager to turn their own ideas into electoral gold.

 

Within the last decade or so, such notable individuals as Alan Sugar, Karren Brady and Michelle Mone have been brought on board as government business advisors.

Sir James v the Chancellor

 

So, it is to some surprise that I read of a spat between Chancellor of the Exchequer, Jeremy Hunt, and Sir James Dyson, the man who owes his multi-billion pound wealth to the creation of a slew of successful home electronic products ranging from vacuum cleaners to hand dryers and hair straighteners.

 

According to The Times, a meeting about research and development (R&D) tax relief turned awkward when Sir James apparently accused Mr Hunt of “ignoring entrepreneurship” before launching a broader critique of Conservative economic policies.

 

The Chancellor replied that Sir James should become an MP if he thought that he could do better.

 

We should remember that Sir James has previous form for taking the Tories to task.

 

In May last year, he suggested that the UK’s tax regime, employment laws and views on intellectual property meant that there were more “forward-looking economies elsewhere”.

A rocky R&D ride?

 

It might be tempting to side with Sir James, especially given the rocky ride which the UK economy has experienced over the course of the last few years.

 

However, it could be argued that the country has actually been too generous when it comes to supporting R&D over the years.

 

Prior to last November’s Autumn Statement, HMRC operated two separate reliefs – the Small or Medium-sized Enterprise (SME) scheme Research and Development Expenditure Credit (RDEC) scheme – which allowed businesses to reclaim sums spent on research.

 

According to figures published just weeks before the changes were announced by Mr Hunt, both schemes were very popular, with £7.6 billion worth of relief being claimed during the 2021-22 tax year – up 11 per cent in just 12 months. (https://www.gov.uk/government/statistics/corporate-tax-research-and-development-tax-credit/research-and-development-tax-credits-statistics-september-2023).

 

That same financial year, though, coincided with an exposé of how R&D tax reliefs were being exploited (https://www.thetimes.co.uk/article/0e379acc-5618-11ed-b965-3a5f647316f8?shareToken=b210304b185b4aa4eba343f8576f2a6c).

 

Instead of companies engaged in the pursuit of cutting edge technologies, some of the beneficiaries included a pub which introduced vegan and gluten-free options on its menu and a laundrette which had offered to lower the temperatures on its washing machines.

 

The schemes, it was reported, were regarded as “free money” by some unscrupulous advisors.

 

Sadly, this should not have been news to anyone. I have commented at various times over the years that this was an accident waiting to happen once the ‘warm, fuzzy’ approach by HMRC to R&D inevitable had worn off.

 

HMRC has been forced to admit that it has been played.

 

In its last annual report, in fact, outlined that “error and fraud” for both R&D schemes in 2020-21 amounted to £1.13 billion or 16.7 per cent of all the relief claimed that year.

 

Some were criminal in origin and, said the Revenue, led to the arrests of nine people in connection with £16 million of “suspect” claims – a drop in the ocean by anyone’s standards.

 

The setting up of an Anti-Abuse Unit and the tightening of the rules around R&D relief did reduce the scale of avoidable payouts the following year but only to £1.05 billion.

 

However, anyone who works in tax knows that HMRC’s approach will largely swing from one extreme to another. So whilst for over a decade HMRC had doled out money like a broken sprinkler system, it now appears that they obfuscate over many claims that are put to them. Further, it seems to be dealt with a largely untrained team that doesn’t understand the basics of the tax management process.

 

This is a shame but, sadly, not a surprise.

 

It is the genuine claimant and their advisers which pay the price.

 

In an effort to stem the losses, Mr Hunt announced in November that both the Small or Medium-sized Enterprise (SME) and Research and Development Expenditure Credit (RDEC) schemes were to be merged into a single relief system from the start of this month.

Conclusion

 

I would suggest that it’s only right that the tax regime in the UK, like any other country, encourages innovation and clamps down on whatever abuse exists, especially when the economic climate is uncertain.

 

Nevertheless, I believe that in lurching from one extreme to another, the people who really suffer are those who are trying to come up with genuinely new and significant products… and their advisers.

 

Improved vetting of R&D relief applications in the past would have both avoided losses which may never be recovered and prevented entrepreneurs having to deal with yet more changes to keep their efforts on-track.

 

If you have any queries on this article, or any tax matters in general, then please get in touch.