Historically, the government's commitment to fostering innovation was a clear and essential pillar of economic success. Although the Labour party have made no recent mention of the R&D tax relief regime, the election result will no doubt bring some uncertainty to the future of the scheme.

Since 2021, the R&D tax relief system has undergone unprecedented changes, with major alterations announced at almost every fiscal event culminating in the new merged scheme being introduced from the 1st April 2024. One would hope that further changes are not being considered and the dust will truly be allowed to settle, giving some level of certainty to both claimants and advisors alike. However, a Labour government may take a critical look at the UK's R&D tax relief system, aiming to further balance innovation support with fiscal responsibility. On the question of net positive value, Labour may conclude that while the scheme has stimulated some genuine research activity, its overall economic benefit has been diminished by abuse and inefficiencies.

New governments would likely view the legitimacy of many R&D claims with scepticism, mirroring the recent change in claim assessment demonstrated by HMRC. With reports of widespread fraud and spurious claims still ringing loudly in the ears of policy makers, this may prompt a still more stringent approach to verification and enforcement, further impacting SME claimants where records need to impeccable. Some might argue that lax oversight has allowed the system to be exploited, diverting funds from truly innovative enterprises and the contraction of the scheme is a direct response to this.

The outgoing Conservative government had signalled their preference to fund innovation through the provision of upfront funding via grants and ‘applied for’ incentives, such as those delivered by InnovateUK. Successive fiscal events dedicated considerable additional funding from the taxpayer to this cause. As many SMEs know, this has coincided with a repeated reduction in value to the R&D tax relief scheme.

The grant application process hugely aids policing of vital innovation funding, with applications reviewed and scored prior to the provision of funds and, quarterly progress and financial reporting required in most situations. This is compared to self-assessment R&D tax relief claims where the validity of the R&D activity is left to the discretion of the claimant company and their chosen advisors. If this approach is to be successful, the grant application process must be streamlined significantly as vast numbers of SMEs are left in the cold when applying for current government grant funding of this type. 

Finally, a new governing party may consider introducing sector-specific incentives aligned with national economic priorities, such as net-zero, life sciences or advanced manufacturing. This could help focus R&D investment where it's most needed for long-term economic growth but could also alienate swathes of the economy leading to a mass exodus of other economically stimulating SMEs and founders as they seek more supportive regimes. 

It is our hope that the new Labour Government leave the newly introduced, merged R&D tax relief scheme untouched for a meaningful period of time, allowing it the opportunity to mature and for policing of the scheme to improve. This will give a clearer understanding of the performance of the scheme and isolate the changes that have been made for true assessment and critiquing. Ultimately though, the new government may aim to further reform the R&D tax relief system aiming to deliver even more tangible economic benefit and support for genuine innovation and providing more effective assistance to SMEs driving the UK's future competitiveness.