Innovation isn’t predictable but claim support should be

Research and development is, by its very nature, uncertain. It’s concept by which pioneers look to innovate, find new techniques, and reveal innovative solutions to the challenges that society faces. If finding new ways of saving time, cutting costs, or disrupting industries in other ways was easy, everyone would be doing it, all the time.

But it’s not.

In searching for the solutions to problems, organisations invest time, talent, and capital without any surety as to whether they’ll succeed or not. That’s precisely why the UK’s R&D tax relief scheme exists, to reduce some of that commercial risk and encourage companies to continue investing in innovation. While the approaches to and outcomes of R&D and innovation are unpredictable and fascinatingly so, the process for claiming support from the schemes built to encourage it shouldn’t be.

Albert Einstein famously described insanity as doing the same thing over and over again and expecting different results. For many businesses claiming R&D tax relief, that sentiment feels all too familiar. If two companies of similar size and industry carry out similar development work, submit claims that reflect the same legislative framework, they should receive similar outcomes from their claims. But that isn’t always the case.

The framework for what does and doesn’t qualify for an R&D tax claim is clear, as should be the outcomes from the claim. Processes are creating uncertainty at the very point where certainty is needed most.

When interpretation outweighs intention

The R&D tax scheme has come under some scrutiny from both sides of the table in recent times. Organisations have reported finding tax claims difficult or confusing to process while HMRC themselves have made changes to prevent the misuse of the scheme from those looking for a quick payday without signs of innovation taking place.

HMRC has every right to ensure that public money is distributed appropriately and that fraudulent or inaccurate claims are challenged. The greater oversight has undoubtedly improved standards across the industry and helped restore confidence in the scheme. The challenge now is that scrutiny has increasingly become subject to interpretation.

R&D tax legislation sets out clear objectives, but the practical application of those rules can vary considerably depending on who reviews a claim. Businesses can invest in identical technologies, overcome similar scientific or technological uncertainties and submit well-documented evidence, yet still receive materially different decisions.

When outcomes become dependent on interpretation rather than consistent application of policy, businesses lose confidence in the process. This in turn can demotivate startups and scaleups from trying to be innovative and therefore risks stifling UK business growth.

Uncertainty makes planning harder

Schemes that offer tax incentives, such as the R&D tax scheme shouldn’t be treated as an unexpected bonus. Fortunately, most businesses do build it into long term financial planning, as done well, it’s a process that can and should be consistent over a number of years.

The funding itself is there to support recruitment, enable additional product development, extend cash runway and help businesses reinvest into future innovation. Many founders make hiring and investment decisions based on the expectation that qualifying activity will receive the support Parliament intended.

When claims become increasingly unpredictable, those decisions become harder to make as decision-makers are left questioning whether to invest today when they cannot confidently forecast the level of support they will receive tomorrow. Certainty and trust in the claims process helps to alleviate any hesitancy that uncertainty creates so consistency is key.

Balancing the books shouldn’t mean balancing risk

Good businesses understand that an element of balancing risk is important to enable growth but that risk shouldn’t come from structured processes like tax claims. Innovative, R&D heavy organisations are investing significant amounts of time documenting projects, collecting evidence and preparing increasingly detailed technical narratives in anticipation of possible enquiries from HMRC. Allocating such an extent of resource to projects that may not reap rewards until much later down the line carries risk. Risk that it may not turn a profit, or that the new solution won’t work despite best efforts.

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To free up the pressure on innovation teams, the support mechanisms that sit behind them have no reason not to offer consistency. Here, greater consistency shouldn’t be viewed as reducing compliance standards, in fact it’s quite the opposite. A more standardised interpretation of existing legislation would improve confidence for businesses while strengthening the credibility of the scheme itself. It would also help HMRC distinguish more effectively between legitimate innovation and claims that genuinely fall outside the rules. Working together and compliance and predictability support the same objectives and in fact reinforce one another.

Businesses deserve to know that if they undertake qualifying work, document it accurately and submit a compliant claim, they can expect broadly consistent treatment regardless of who assesses it. It’s that principle of consistency that forms the backbone of trust in any tax incentive.

Supporting innovation means supporting confidence

The UK continues to position itself as a global leader in science, technology and innovation. If that ambition is to become reality, beyond financial incentives, businesses need confidence that those incentives will operate consistently. Just this week, the Government announced further regulatory reforms to support UK businesses to commercialise products and innovation much faster which is another encouraging step in establishing the UK as an innovation powerhouse.

Innovation will always involve uncertainty. New ideas fail, experiments don’t always deliver expected results, and technological breakthroughs rarely follow a straight line. However, the administration of innovation policy, however, should not carry the same levels of uncertainty.

The support to innovate and grow is there for those who deserve it. It just needs to be applied and navigated with care, clarity, and consistency for it to have the desired impact on UK business.