As businesses across the UK prepare for the changes to R&D policy planned for April, the government has begun consulting on further changes for 2024. As the landscape shifts again, staying informed is crucial.
Starting with the Autumn Budget of 2021 – and through various updates since then, including the 2022 Autumn Statement – the government has signalled its intention to reform the UK’s research and development (R&D) tax regime. It plans to do so through several policy changes, beginning in April of this year.
One change involves a refocusing of R&D tax relief towards UK-based innovation. Currently, UK companies can claim for R&D work carried out overseas. From April 2024, this will no longer be the case, barring some exemptions, such as if the work requires certain “geographical, environmental or social conditions” that objectively do not exist in the UK, such as deep ocean research.
There is some concern, however, that the UK workforce has the skills necessary to compete with a globalised workforce. If employers cannot source competitive labour in the UK, the tax relief changes mean there’s less incentive to keep that capital in the UK, says Giordano Goggioli, Senior Associate at Markel Tax.
Another change involves an expansion of qualifying R&D expenditure to include data licenses, cloud computing, and pure mathematics. The former reflects the prevailing business model of many software companies that offer “software as a service” (or SaaS), while the latter recognises growth areas like AI, machine learning and robotics are often underpinned by pure mathematical advancements.
“The R&D scheme was first adopted in 2000, and aside from an appendix focused on software companies that was published in 2016, it hasn’t changed since then, whereas obviously technology has advanced significantly over that period. This is a welcome change that’s really about modernising the scheme”, says Giordano.
Changes to the claims submission process for R&D tax relief are also planned. For all accounting periods starting from 1 April 2023, claims must be submitted digitally, and must be supported by a named officer at the company. Perhaps most notably, claims must include a technical report and detailed calculations of the relief claimed, meaning greater expertise will be required to submit a claim robust enough to stand up to an HMRC enquiry. “It’s very difficult for an accountant to write a technical submission for a software or pharmaceutical company, for example, because without that technical knowledge, they’re completely at the mercy of the company’s claim that a genuine technical progress has been demonstrated”, says Justine Dignam, Director of Incentives and Reliefs at Markel Tax.
Most recently, the government announced that it would rebalance the rates of R&D tax relief available to different types of businesses 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, which the government believes could be made more internationally competitive, will rise, while the SME scheme’s rate will be cut, in the hope that it will attract fewer fraudulent claims. The changes also mean a reduction in tax relief for loss-making SMEs.
Abuse of the R&D scheme has undoubtedly been a problem at the lower end of the market, says Justine, but the government’s “broad and shallow” response, which reduces the attractiveness of the scheme to all loss-making SMEs, is like “using a sledgehammer to crack a nut.” The changes also mean that businesses with a December year-end will have to apply the old rates between December and April 2023, and then apply the new rates for the remainder of the year, leading to “some very complicated calculations”.
As businesses prepare to deal with the changes outlined above, the government has also begun consulting on a further major proposed change to R&D policy, to be introduced in 2024. The plans involve consolidating the two existing R&D schemes into a single “simplified” scheme based on the existing RDEC scheme, which would also have altered qualifying criteria. The eight-week consultation runs from 13th January to 13th March 2023, after which more details will be announced.
One of the main drivers behind the government’s policy thrust is to combat fraud and error; HMRC estimates that these combined have cost it a total of £469m. “Tackling fraud and error is a really positive thing”, says Justine, but concerns remain around the arguably rushed implementation of the changes, and whether they will unfairly penalise innovative UK businesses.