In the Spring Statement 2022, Rishi Sunak promised to make the UK’s Research & Development (R&D) Tax Credits regime more generous. But what will he do?
UK business R&D investment is less than half of the OECD’s average as a percentage of GDP, so the Chancellor says R&D tax reliefs will be reformed to deliver better value for money for the taxpayer while being more generous where they can make the most difference.
The scope of reliefs will also be expanded from April 2023 to cover data, cloud computing and pure maths, to boost sectors including AI, robotics, manufacturing, and design. These are sectors in which the UK excels.
Draft legislation has been promised for this summer, so, as ever, the details are awaited.
Details we know so far
The exact details of how R&D tax reliefs are to be reformed from April 2023 are a bit sketchy at the moment and the Treasury is most probably digesting responses to its recent R&D Tax Reliefs Report.
In the Spring Statement it confirms that what it said in the recent report is indeed how R&D tax reliefs will be reformed, and in particular it confirms that from April 2023 all cloud computing costs associated with R&D, including storage, will qualify for relief.
UK activity
It also says that the government remains committed to refocus support towards innovation in the UK, ensuring that the UK more effectively captures the benefits of R&D funded by the reliefs.
However, this will not be welcomed by those companies that use overseas contractors, assets and facilities for part of their R&D where the necessary resources are not available in the UK.
Read our recent article for more background: Will restricting R&D Tax Relief to UK activity backfire?
It appears that the government may be listening to some of those concerns as it says that it recognises that there are cases where it is necessary for the R&D to take place overseas. It will, therefore, legislate so that expenditure on overseas R&D activities can still qualify where there are:
- material factors such as geography, environment, population or other conditions that are not present in the UK and are required for the research, for example, deep ocean research
- regulatory or other legal requirements that activities must take place outside of the UK, for example, clinical trials.
Mathematical advances
To support the growing volume of R&D underpinned by mathematical advances, the definition of R&D for tax reliefs will be expanded by clarifying that pure mathematics is a qualifying cost.
Larger companies
And for larger companies, the government says it will also consider increasing the generosity of the Research & Development Expenditure Credit (RDEC) scheme to boost UK R&D investment. This would rebalance the schemes and make RDEC more internationally competitive, says the government.
However, any improvement to the RDEC scheme should not be at the expense of a tightening of the rules for smaller companies claiming R&D tax credits. That would be unfair.
The RDEC scheme is available to large companies that employ more than 500 staff or have a turnover of more than €100 million and more than €86 million in gross assets.
Advance notice of a R&D claim
Another contentious measure proposed by the government is to make companies inform HMRC in advance that they plan to make a R&D claim.
In many cases this is impossible or at the very least extremely challenging, particularly for a new company, and so it is to be hoped that the government will change its mind on this to avoid many companies losing out.
It is not always apparent that a claim can be made until the work has actually been done, so this measure would effectively penalise those companies that have incurred genuine R&D expenditure but were not aware of the rules.
We await to see what measures eventually emerge.
R&D resources at Bishop Fleming
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If you would like to discuss your R&D planning, please contact any of the R&D team at Bishop Fleming.