R&D measures aimed at preserving the UK’s status as a “science superpower”

In autumn’s Budget, Chancellor Rishi Sunak announced research and development (R&D) measures that he believes will help the UK maintain its position as a “science superpower.”

The chancellor pledged that the government would increase R&D spending to £20 billion per year by the fiscal year 2024-25, implying that the country would invest 1.1 percent of GDP in R&D by 2024. At the same time, he revealed plans to change R&D tax relief, a scheme that allows qualifying businesses to reduce their corporation tax bills.

The first proposed change is to broaden the relief to include data and cloud computing costs, while the second is to limit relief to R&D activity in the UK. Both changes will be included in the Finance Bill for 2022-23, but will not take effect until 1 April 2023.

“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.”

Costs associated with data and cloud computing are being covered by an extension.

The extension of R&D relief to include data and cloud computing costs is something that businesses have been pushing for quite some time.

“It’s a small change that will boost the value of a company’s claim for relief, and it’s a welcome development.” The existing R&D relief rules were a little out of date, and this change acknowledges that, of course, cloud computing and data are part of many businesses’ activities.”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 other proposed R&D relief change has yet to be fully fleshed out. “The headlines have all been about limiting relief to R&D activity in the UK,” James notes, “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 entirely.”

“In other countries, there are different relief rates for domestic and overseas activities,” he continues, “so the change here could be something similar to that.” I know that many of our clients have subsidiaries doing R&D in other countries or close working relationships with overseas companies doing R&D.

A balance must be struck between encouraging investment in the UK and recognising that a UK company has the right to establish R&D operations abroad if it so desires.”

“It’s another case of waiting for the details, but whatever the outcome, companies will need to weigh the factors and calculate whether it’s still cheaper to do R&D overseas without relief at all 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.”

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. “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.”

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. We’re specialists on this so we can tell you what qualifies and what doesn’t and guide a business through the process.

We can help you understand what HMRC want, which makes 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.