Following the changes to R&D tax relief policy he announced in the Autumn Statement, Jeremy Hunt unveiled further changes in his first Spring Budget as Chancellor, with more likely to follow in the coming year.
Since tax credits for research and development (R&D) were introduced by the first Blair government, the legislation underpinning them has remained largely unchanged. Recently, however, the UK’s R&D tax landscape has begun to shift. ”There’s been more policy change announced in the last ten months than there has been in the ten years before that”, says Adam Ellerington, Senior Tax Manager at Markel Tax.
On Wednesday, Chancellor Jeremy Hunt used his Spring Budget speech to announce further tweaks to the system, most notably relating to tax credits for R&D-intensive small and medium businesses.
In the autumn, Hunt revealed plans to rebalance the rates of R&D tax relief available through its two R&D schemes: the SME scheme, for smaller businesses, and the R&D expenditure credit (RDEC) scheme, for larger businesses. The rate for the RDEC scheme was to rise, with the aim of making it more internationally competitive, while the rate for SMEs was to be cut, with the aim of making it less attractive for fraudulent claims.
Despite opposition from the UK’s tech industry, the government announced on Wednesday that while it will press on with the changes, additional tax relief for “R&D-intensive SMEs” – those for whom R&D expenditure is 40% or more of total expenditure – will be available, through a higher payable credit rate of 14.5%. “The intensive SME rate is still lower than the current rate”, says Adam, “but the cut is not as high as it will be for other SMEs.”
Hunt also announced on Wednesday that from 1st August this year, all claims filed with HMRC will need to be supported by a technical report. This is in advance of the requirement for all claims to be digitally filed through an online form, applicable for all accounting periods starting from 1 April 2023 and which will standardise the format of supporting information provided.
The Autumn Statement also included a move to refocus tax relief towards UK innovation by preventing companies from claiming for R&D work carried out overseas. However, concerns were raised that businesses contracted to carry out R&D work abroad over longer periods could be left in a difficult position. On Wednesday, the plans were delayed for 12 months.
What’s still to come?
The government has also been consulting on plans to consolidate its two R&D schemes into a single, simplified scheme. The consultation period closed on Monday, with draft legislation on a merged scheme for technical consultation due alongside the publication of the draft Finance Bill in the summer.
“Rather than a properly thought-out approach, we’re seeing ad-hoc changes to the system”, says Justine Dignam, Director of Incentives and Reliefs at Markel Tax. “Would it not have been better to wait until later in the year, when the announcement on merging the two schemes is due, to announce these changes? If you spoke to any credible provider in the sector, I think between them they would be able to agree a solution quite quickly, in terms of how to tackle error and fraud.”
In Adam’s opinion, the general view is that the current system doesn’t work effectively and more widespread changes to R&D policy are likely in the next two or three years, regardless of the political landscape.
To learn more about R&D and how Markel Tax can assist with navigating the upcoming changes, click here.