The following changes were announced.
“2.41 Alongside this, the government is reforming R&D tax reliefs to support modern research
methods by expanding qualifying expenditure to include data and cloud costs, to more
effectively capture the benefits of R&D funded by the reliefs through refocusing support towards
innovation in the UK, and to target abuse and improve compliance. Further detail is set out later
in this chapter.”
“Reforming UK R&D tax reliefs
2.72 The UK tax system provides very generous support to encourage companies to conduct
R&D activity, worth 0.25% of GDP in 2018 compared to an OECD average of 0.1% of GDP. 46
However, UK businesses invest less than half the OECD average in R&D.
2.73 Following the consultation launched at Spring Budget 2021, the government is
announcing reforms to R&D tax credits.
2.74 To ensure the R&D tax reliefs continue to support cutting edge R&D methods, the
government will expand qualifying expenditure to include data and cloud computing costs,
reinforcing the UK’s status as a science superpower.
2.75 While UK companies claimed tax relief on £47.5 billion of R&D expenditure in 2019, the
ONS estimates that businesses only carried out £25.9 billion of privately-financed R&D in the
UK. This gap is partly explained by companies being able to claim for activity taking place
overseas. This suggests that the UK is not effectively capturing the benefits of R&D funded by
the UK taxpayer through the reliefs. Many other countries, including Australia and the USA, do
not offer relief for R&D activities performed overseas.
2.76 To more effectively capture the benefits of the reliefs, including improved skills, know-how
and understanding, the government will refocus the reliefs towards innovation in the UK.
2.77 The government will also set out plans to tackle abuse of and improve compliance with
the R&D tax reliefs later in the autumn.”
Source . BUDGET 2021: Protecting the jobs and livelihoods of the British people (publishing.service.gov.uk)
The four main takeaways are:
- Continued support for R&D as a key plank of industrial strategy.
- A positive change allowing companies to claim data and hosting costs but no information on when this will be applicable. It is unlikely to be retrospective, and we await details.
- A restriction in claiming overseas subcontractor costs, I assume also Externally Provided Workers. The Chancellor in his speech said this was for accounting periods starting from 1st April 2023. We await further details.
- The point above in 2.77 was not mentioned in the budget on improved compliance. We will have to see what they come up with on this, but a balance has to be struck between compliance and off putting red tape for claimants. A strength of the UK schemes has been the relative ease with which companies can claim. So many international R&D schemes are laden with bureaucracy. It is hard to a take a view without detail. Personally and within our company we spend a lot of times making sure our claims are compliant, with a compliance check process on every claim and internal training on compliance.
UPDATE 02/11/21
“2.9 Research & Development (R&D) tax relief reform
Following the consultation launched at Spring Budget 2021, as announced at Autumn Budget 21, R&D tax reliefs will be reformed to support modern research methods by expanding qualifying expenditure to include data and cloud costs, to more effectively capture the benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK, and to target abuse and improve compliance. These changes will be legislated for in Finance Bill 2022-23 and take effect from April 2023. Further details of these changes and next steps for the review will be set out in due course.”
These changes on data/cloud computing and disallowing overseas R&D expenditure could not be described as imminent. These will not be legislated in the 2021-2022 Finance Bill, but will be in the 2022-2023 Finance Bill and take effect from 1st April 2023. The advanced notice may impact companies R&D expenditure and could even delay R&D activity, for example if your R&D involves a large purchase of qualifying data (this has not been specified and won't until we get draft legislation) it is worth thinking about delaying the expenditure until it can be included in an R&D claim.
Because of the big gap between the announcement and implementation I would also be concerned that uniformed claimants assume these costs can be claimed once announced. That is not the case they case the current rules apply until new legislation is brought forward in 2023. It is also not clear if the changes will be for accounting periods starting from 1st April 2023, or if the rules will split an existing accounting period e.g. before 1st April 2023 no Cloud Computing costs but after you can claim. These matters have been handled in both ways in the past. We will not know until we see the legislation in about one year.
Christopher Toms – Compliance Director RandDTax.