Chancellor Rishi Sunak announced research and development (R&D) measures in this week’s autumn Budget that he believes will help maintain the UK’s place as a “science superpower”.
The chancellor pledged the government would increase R&D spending to £20bn a year by the tax year 2024-25 tax, a move that will mean the country is investing 1.1% of GDP on R&D by 2024. At the same time, he also revealed plans to make changes to R&D tax relief, a scheme which qualifying businesses can use to cut their corporation tax bills.
The first proposed adjustment is to extend the relief so that it includes data and cloud computing costs, while the second alteration is aimed at limiting relief to R&D activity in the UK. Both changes will be legislated for in the Finance Bill of 2022-23 but won’t come into effect until 1 April 2023.
James Clark, Markel Tax’s associate director of tax incentives and reliefs, says that although the £20bn spending shows the government’s continued commitment to R&D, it’s not as much as was hoped for. “It’s a step back from last year’s budget target of £22bn a year by 2024-25, which has now been pushed back to 2026-27.
“But it’s not a case of the government pulling up the drawbridge on funding R&D, just a change in the timing, which is not unexpected given the challenge the Chancellor has balancing the books because of the pandemic. I think businesses will understand R&D can’t be viewed in isolation, and that it’s a part of the overall economic strategy in exceptional circumstances.”
Extension to cover data and cloud computing costs
On the extension of R&D relief to cover includes data and cloud computing costs, James says this change is something businesses have been pushing for quite a while.
“It’s a tweak that will increase the value of a claim for relief for companies and will be a much-appreciated development. The existing rules around R&D relief were a little bit outdated and this change recognises that, of course, cloud computing and data are part of a lot of businesses’ activities.”
However, he warns that final guidance from HMRC on what will qualify under the scheme’s extension has still not been given. “The challenge for HMRC is defining cloud computing and data costs that qualify for relief. It could be a bit of a tightrope as to what qualifies and what doesn’t so that there aren’t unwanted knock-on effects down the line that open the door to a flood of claims.
“That will need working on and HMRC have said more guidance will follow later this year. The extension doesn’t come in until April 2023, so the government has given itself some time to work out how to implement this.”
Linking relief to UK R&D activity
The detail is also still to come on the other proposed R&D relief change. James points out: “The headlines have all been about limiting relief to R&D activity in the UK but the guidance from HMRC actually only mentions ‘refocusing support towards innovation in the UK’ and I’d be very surprised if the plan was to eliminate relief for overseas R&D altogether.”
He adds: “In other countries there are different relief rates for domestic and overseas activities so the change here might be something similar to that. I know among our own clients there are a lot of companies with either subsidiaries doing R&D abroad or close working relationships with overseas companies carrying out R&D.
“So, a balance needs to be struck between encouraging investment in the UK but also recognising the fact that a UK company is entitled to set up its R&D operations overseas if it wants to.
“It’s another case of waiting for the details but whatever the end result companies will need to weigh up the factors and do their calculations about whether it’s still cheaper to do R&D overseas without relief altogether or at a reduced level of relief.
“The loss of relief won’t be enough for most companies to stop that activity. The conversations we have show that no one does R&D just for the tax relief – it’s undoubtedly a bonus but, essentially, you’re spending the money because you’ve got an idea that you want to bring to the market.
“However, it will be more important for companies in the early part of their lifecycle when they are still making a loss because the relief can be a vital cash injection that can really keep them going.”
HMRC plans to crack down on abuse
Not mentioned in the Chancellor’s statement but announced the same day was news that HMRC will clamp down on abuse of the R&D relief scheme. James explains: “This is one of the drivers for linking claims more to UK R&D activity because it’s harder for HMRC to verify overseas claims – or to prove that they are fraudulent. With a domestic claim, it has more tools at its disposal.”
He adds: “HMRC is also talking about improving compliance, something that Markel Tax strongly supports, although just how it plans to go about that is, again, unclear at the moment.”
Get the best professional guidance
With so much of the fine detail still to be worked out around R&D relief claims, it’s always worthwhile getting the best professional guidance from a reputable source. James says: “The benefit that we at Markel Tax and other experts bring is our focus on R&D – we’re specialists on this so we can tell you what qualifies and what doesn’t and guide a business through the process.
“An analogy that explains this is that you can go to a GP who can tell you might have a health problem, but they won’t know how solve that problem – they have to send you to a specialist. So, in our field, an accountant might suggest a business cost might be R&D, but you need to see a specialist to really find out.
“Being members of the HMRC’s R&D Consultative Committee helps us understand what HMRC want, which helps in our goal to make the claim process as easy as possible for our clients. We can minimise the time a client has to spend answering questions and supplying information and focus on what’s relevant. It’s just a more efficient approach.”