Controversy intensifies over UK R&D tax relief, as statistics office revises its spending estimates

The UK statistics office raised its estimate of how much small businesses spend on research and development, further fueling a debate over UK tax policy for R&D.

The Office of National Statistics on 22 November said it estimates business R&D spending in the UK at £46.9 billion in 2021, up by £2.9 billion since 2020 – meaning that, combined with public-sector spending, the country’s ranking as a global research power jumped up several notches.

But the bulk of that reported increase came from ONS changing the way it estimates R&D spending, especially by small companies. The revision, it said, added £17.1 billion to its prior 2020 estimate. And that figure is even slightly higher than it foreshadowed in September, when it first announced that it was changing its methodology – and in the process setting off a storm of controversy.

That controversy deepened after the latest ONS announcement. The numbers had factored into an announcement last week by Chancellor Jeremy Hunt that the government is slashing R&D tax credits for small business, citing evidence of companies fraudulently over-estimating their spending to claim tax relief. The issue was first flagged publicly by a huge discrepancy emerging between the high tax relief claims at Treasury and ONS’ low R&D spending estimates.

But the latest figures prompted immediate cries of “foul” from UK business advocates. They argued that the new ONS numbers show small companies really do spend more on R&D than previously estimated, and so the last thing the government should be doing is reducing the tax relief that encourages it.

In a statement, the Federation of Small Businesses said that the upward revision “should have been a moment of triumph for the small business community and the UK economy. But the Chancellor has turned triumph to disaster, with the self-inflicted R&D credit crunch set to cut a swathe through start-ups, spin-outs and advanced engineering companies. Driving small R&D firms out of business is economic vandalism.”

Likewise, Catax, an innovation consulting firm said the modest 6.2% rise in annual spending from 2020 – far below the inflation rate - shows that more, not less, tax relief is needed. “It’s apparent that innovation investment is barely growing at all according to the latest ONS figures. This anaemic expansion in spending, coming in at less than 1% in real terms, is precisely why the government was wrong to announce a reduction in the tax relief available to SMEs.”

The fight is far from over: in its statement, ONS said it is still working on a new and improved methodology for next year.