Budget 2021: Research and Development tax relief

In today’s Budget Rishi Sunak announced changes to the valuable R&D tax relief regime. 

Currently

The UK provides generous tax relief to companies that undertake R&D in the hope that this will encourage investment and spur the growth and development of the UK economy in the medium to longer term. To briefly recap, the relief offers either an additional 130% deduction on the qualifying expenditure (230% total) for small/medium companies or a 13% taxable credit for large companies. Where the company is loss-making, the additional relief can be surrendered for a repayable cash amount from HMRC.

However, it is felt that the reliefs are either not focused enough or can be subject to abuse by certain businesses so that the relief does not achieve its intended purpose.

There have already been attempts to combat this by introducing a cap on the surrenderable loss (three times the company’s PAYE and NIC liability in a period, plus £20,000) and by tying the UK’s patent box regime, providing further generous tax reliefs on income from exploiting Intellectual Property, directly to the R&D expenditure incurred.

Autumn Budget 2021 changes

However, it seems the government is looking to go even further as part of a consultation earlier in the year and confirmed at Autumn Budget 2021. The government will look to focus support towards UK businesses carrying out R&D domestically. It is likely relief will be restricted or withdrawn entirely where companies subcontract any of their qualifying R&D expenditure overseas.

HMRC are also expected to be provided with greater powers in relation to the tackling of abuse and non-compliance with the R&D scheme to further focus the benefits of the scheme.

On a more positive note, the government confirmed that data and cloud computing costs would be included in the expanded definition of R&D qualifying expenditure. In the past data or cloud computing costs would only be eligible if they directly related to the R&D undertaken (which in itself was difficult to confirm), making it highly unlikely that 100% of the expenditure would qualify. This change would do away with that restriction, being a welcome change particularly for those companies in the software and IT sectors.

Further detail is expected to follow in due course later in the year so watch this space.

To consider whether your company could be eligible for R&D tax relief, please contact us.

Join our Budget question time – Connecting the dots webinar on Friday 29 October, where our panel of tax and finance experts will be on hand to answer your Budget related questions.