In his Spring Statement this week, Chancellor Rishi Sunak announced further support for SMEs and the expansion of R&D tax reliefs. It was previously announced that from April 2023 cloud computing costs associated with R&D will qualify for relief and that the government remains committed to refocus support towards innovation in the UK.
Some expenditure on overseas R&D activities will still qualify for relief
Whilst the government wants to ensure that the UK more effectively captures the benefits of R&D funded by the reliefs, it recognises that there are some cases where it is necessary for the R&D to take place overseas and will, therefore, legislate so that expenditure on overseas R&D activities can still qualify where there are:
- material factors such as geography, environment, population or other conditions that are not present in the UK and are required for the research – for example, deep ocean research
- regulatory or other legal requirements that activities must take place outside of the UK – for example, clinical trials
Pure mathematics to become a qualifying cost
To support the growing volume of R&D underpinned by mathematical advances, the definition of R&D for tax reliefs will be expanded by clarifying that pure mathematics is a qualifying cost. This reform will support nascent sectors where the UK has a comparative advantage such as Artificial Intelligence, quantum computing and robotics while also supporting strong sectors such as manufacturing and design. Where required, legislation will be published in draft before being included in a future Finance Bill to come into effect in April 2023.
Government is acting to create conditions for private sector innovation to flourish
At Autumn Budget 2021 it was announced that public investment in R&D will increase to a record level of £20 billion per year by 2024-25. This landmark funding for science and innovation aims to deliver the government’s science superpower ambitions and tackle the great challenges facing the world.
The Chancellor’s statement says that while the government has an important role to play in supporting science and innovation, public investment cannot on its own be expected to drive productivity growth to make the UK the most innovative economy in the world. Private enterprises will create the technologies, products and services, and government is acting to create the conditions for private sector innovation to flourish.
Ultimately businesses will need to invest more in R&D and the UK’s R&D tax reliefs have a key role in this. The Spring Statement outlines options the government is considering to ensure the system is globally competitive while properly incentivising innovation.
The UK has one of the most generous R&D tax relief systems in the world with spending, as a percentage of GDP, more than any other country in the OECD. Since 2007 spend has increased from 0.05% to 0.34% of GDP in 2019. Despite this, the UK has not seen the desired results, with self-financed business R&D only rising from 1.0% to 1.2% of GDP, which is less than half the OECD average.
Value of RDEC potentially to be increased
HMRC evaluations suggest that the Research & Development Expenditure Credit (RDEC) stimulates between £2.40-£2.70 of additional private R&D expenditure for each £1 of tax relief claimed, while the SME scheme only stimulates £0.60-£1.28. The government is looking to understand why these figures are so different and what further changes might be needed to ensure that tax subsidies incentivise companies most effectively to invest in additional R&D. In addition to these initial reforms to R&D tax reliefs, the government is considering further steps to ensure that they are as effective as possible whilst delivering the best possible value for taxpayers. To ensure the effective targeting of the UK’s R&D relief the government is looking at increasing the value of RDEC to boost R&D investment in the UK. This would rebalance the schemes and make RDEC more internationally competitive.
More to be done to tackle abuse of R&D tax reliefs
The government will also consider what more can be done to deal with the abuse of R&D tax reliefs, particularly in the SME scheme, ahead of Budget 2022. This is an issue that must be tackled, and the government announced in November the creation of a new cross-cutting HMRC team focused on this.
As a valuable source of innovation funding to UK businesses of all sizes, the government is continuing its review of R&D tax reliefs and further announcements will be made in the autumn.
For more information on R&D tax reliefs or to find out how your business could benefit from these incentives, please contact us.