Polling Station - Image accompanying GrantTree's blog regarding what the Labour party would mean for the future of R&D Tax Relief

What Would a Labour Government Mean for R&D Tax Relief?

With Labour way ahead in the polls, I explain what a Keir Starmer-led administration would mean for the future of R&D Tax Relief. 

There are no two ways about it. The last three years have been extremely turbulent for R&D Tax Relief, a UK incentive that rewards companies for investing in innovation.

A series of sweeping reforms have, amongst other things, overhauled the application process, altered the amount of funding available, and introduced a pre-notification requirement for companies that have not filed before or in any of their last three accounting periods. The government has also merged the SME and Research and Development Expenditure Credit (RDEC) schemes, creating the first new R&D Tax regime in more than ten years. 

Many businesses have struggled to keep pace with these considerable changes and maintain compliance. This has doubtlessly contributed to the large number of partially or wholly ineligible claims submitted to HMRC. The tax agency now estimates that half of all R&D Tax submissions are non-compliant, an issue it has looked to address by implementing a range of countermeasures, including increasing the number of claims enquired from less than 1% to 20%.

Thankfully, the government has promised not to make further changes to the scheme for the foreseeable future. However, with an election looming later this year and polls suggesting a substantial Labour lead, we must consider what a Keir Starmer premiership would mean for the future of R&D Tax Relief.

What has Labour said about R&D Tax Relief?

In its comprehensive Business Partnership for Growth prospectus, the Labour Party promised “stability” for R&D Tax Relief and has committed to maintaining the scheme’s current structure “over the next parliament”. Assuming we don’t experience another period of major political upheaval, this would mean four to five years without further changes to the scheme.

...there has been far too much chopping and changing in recent years, with five changes announced this parliament alone. To provide stability, Labour will maintain the current structure of R&D tax credits over the next parliament, while cracking down on fraudulent claims and those made in error.

This will be welcome news for business leaders, though some will have hoped Labour would be reversing the government’s recent cuts to SME R&D Tax Relief. As GrantTree’s Head of Client Operations Sam Aiken told UKTN recently, these cuts have deprived “early-stage companies of more than £1bn of much-needed funding”. 

The party also underscored its overall support for R&D Tax Relief. It highlighted the scheme’s “sizeable positive impact on research and development spending by UK companies” and noted that it was a Labour government that introduced the scheme 24 years ago, since then it has provided innovative businesses with over £55 billion in cash credits and tax rebates.

Finally, Labour pledged to “evaluate the impact of [R&D Tax Relief] on a sector-by-sector basis, starting with the Life Sciences industry.” The party says this will allow it to see how the scheme supports the UK’s “world-leading industries” and determine which sectors are more prone to producing erroneous and fraudulent claims. It’s unclear how this work will overlap with or build upon HMRC’s recent efforts to deter non-compliance.

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Are we really entering a period of stability for R&D Tax Relief?

Parties don’t always do in power what they say they will do in opposition. Changes to the direction of the economy, public finances and party priorities can reshape policy, as can agreements made during the formation of a coalition government, another possible outcome of the next general election.

Still, there’s good reason to believe this tumultuous period for R&D Tax Relief has come to a close, at least for now. Yet, with the new merged scheme affecting accounting periods starting on or after 1 April 2024, companies will be working to understand the implications of new complexities for many months to come.

Whatever this year’s election holds, my colleagues and I will be watching closely and publishing new guidance on GrantTree’s blog as and when updates are provided. To keep up to speed with all the latest R&D Tax news, make sure you sign up for our monthly newsletter.

If you have specific questions about R&D Tax Relief, the recent reforms, or your upcoming claim, please get in touch. My colleagues and I would be happy to help.