The Business-Government Forum on Tax and Globalisation met in June. We welcome the government’s enthusiasm to encourage innovative activities that contribute to the ‘knowledge economy’.

A key mechanism in support of this is the research and development (R&D) tax credit regime for SMEs introduced in 2000. It is unfortunate that new restrictions on the availability of this tax relief hinder the effective delivery of what is an attractive and effective incentive.

The most recent illustration of this is a change of HMRC policy on the application of the statutory rules.  Earlier this year, guidance was issued regarding the borderline between R&D and production activities. This has been criticised by many. A further issue has now emerged.

A condition that applies to SMEs claiming relief, but not more generally, is that the company undertaking the R&D must own the intellectual property (IP) created.  The rationale for the restriction is understandable. It was intended to ensure that, if IP was a UK asset, then its subsequent removal from the UK would potentially give rise to a charge to tax (although it is questionable how many SMEs would indulge in such practices). Many organisations such as AIM-listed companies follow legal advice to separate R&D activities from the ownership of the IP for commercial reasons within a UK group. Until now, HMRC has in practice been happy for the asset to be owned for a very short period. 

HMRC is now adopting a much more restrictive approach. If a claim for R&D tax relief is to succeed, the company must both own all IP created as a result of the R&D expenditure and retain the right to apply for and own the patent etc. This means that, even if all the IP is retained within the UK group, because it is not specifically registered in the name of the R&D company, no R&D tax relief will be available under either the SME scheme or the large company scheme. This change in practice is an unwelcome restriction on the commercial structures put in place, will do nothing to encourage R&D activity and treats SME groups more harshly than their larger multinational competitors.