Future reform of R&D tax credits?

Rishi was silent on R&D in today’s Budget speech, but the Red Book included details of a Government review of R&D tax reliefs. The Government has an ambitious target to raise total investment in research and development to 2.4% of UK GDP by 2027. R&D tax reliefs are seen as having a key role in incentivising this investment by reducing the costs of innovation.

The R&D review is in the form of a new consultation covering both the small company (SME) and large company (RDEC) schemes, with the aim of ensuring that the reliefs remain up-to-date, competitive, and well-targeted.

In addition, the responses to the previous consultation on the types of expenditure which should qualify for relief have been released and prompted the wider review.

There are three areas worthy of comment:

1) New R&D consultation

Since the introduction of R&D tax credits, there has been a shift in the way R&D is conducted commercially but the current tax schemes have not adapted to this shift. In fact, there has not been any significant changes to the definition of R&D or the qualifying spend in my time as a tax advisor. The consultation should be welcome by R&D claimants as this could result in a change in the R&D rates, the definition of R&D and the type of expenditure to be included.

In addition, the consultation is looking to incorporate controls and policies to combat abuse of the schemes, mainly around how the claims are submitted and the information to be made available. For further reading, the consultation link is here.

2) Review of expenditure

The Government will consider bringing data and cloud computing costs into the scope of relief alongside a number of other policy options and priorities as part of the wider consultation.

The conclusions of the consultation last year state that there is a strong case for bringing data and cloud costs into the scope of R&D claims. This will be a welcomed relief for many companies, but we won’t see any changes in this Finance Act.

3) The PAYE cap

One R&D change we will be seeing this year is the introduction of the PAYE cap. This restriction was announced in a previous Budget and will be relevant for accounting periods beginning on or after 1 April 2021. The SME payable R&D tax credit that a business can receive in any one year will be capped at £20,000 plus three times the company’s total PAYE and NICs liability, in order to deter abuse.

We will continue to monitor the developments on R&D and will publish these as they are announced.

We will be regularly updating the Budget pages of our website. If you would like to discuss the implications, please don’t hesitate to get in touch. Alternatively, book your place on our Budget question time webinar on Friday 5 March 2021 to find out more.