The road to 2023
23 December 2021
As the government refocuses support towards innovation in the UK, big changes are coming to R&D tax incentives from April 2023. These announced changes aim to modernise the current regime, so with that, let’s recap where we are now and explore what’s to come.
At Spring Budget 2021, alongside public consultation, the government launched a review of the Research & Development (R&D) Tax Credit Scheme. The objectives being:
- To ensure the UK remains a competitive location for cutting-edge research
- That reliefs continue to be fit for purpose
- That taxpayer money is effectively targeted
The Chancellor published changes, exploring the nature of private sector R&D investment, how it’s supported, and where any appreciable changes could be made.
So, what were the key drivers for this consultative change and what’s been agreed?
1. Data & Cloud Computing Costs
Since the inception of the R&D Tax Credits Scheme in 2001, the world has changed vastly with technology having a considerable part to play in this. Therefore, costs such as data purchases and cloud hosting should be considered as qualifying expenditure.
What’s changing? In line with branding the UK as a ‘Science Superpower’, data purchases and cloud hosting costs will now be allowable for the enhanced deduction.
2. Compliance (or lack thereof)
The lucrative nature of the scheme has led to some significant cases of abuse and ‘boundary-pushing’, leading to unfair reward to unqualifying companies.
What’s changing? The government intend to set out how they will tackle abuse of the scheme and improve compliance. A number of changes, such as digital claim submissions, will be put in place from April 2023.
HMRC is considering whether it continues to maintain two separate relief systems – The Research & Development Expenditure Credits (RDEC) and the Small or Medium sized Enterprise (SME) scheme, or consolidate them into one.
4. Refocusing the reliefs towards innovation here in the UK
The announcement included a commitment for greater emphasis on R&D performed in the UK, however, there was a view that restricting tax relief to UK activities only could weaken the incentives for companies to base the leadership of their global R&D efforts in the UK.
What’s changing? In an attempt to drive UK skill set, know-how and understanding, projects with activity outside of the UK will no longer be allowed to contribute to the overall claim. All companies will need to consider how their R&D activities are structured to ensure the costs remain allowable in the UK.
Save the dates
The proposed changes will be introduced in Finance Bill 2022-23, to take effect from April 2023. Further details are to be published in due course.
Despite pushing back the timeframes for achieving its target of increasing public R&D investment to £22 billion from 2024/25 to 2026/27, the government still aims to increase investment to £20bn by 2024. It also remains committed to achieving its target of increasing investment in R&D to 2.4% of GDP by 2027.
What this means for you as a business owner
Right now, nothing.
Once we pass this date however, we’ll need to work with you and your teams to accurately identify where we can include data and cloud hosting costs, but more importantly where we can continue to bullet proof your claims and ensure your company’s not open to any scrutiny from HMRC.