Following Rishi Sunak’s Autumn Budget announcement back in November of last year, the chancellor’s recent Spring Statement provided more clarity into how the UK economy will implement change to recoup following a tough few years.
In this blog, we’re going to focus on what Sunak’s Spring Statement means for Research and Development (R&D) Tax Relief, and how R&D Tax Credits will have to take new legislation into consideration to meet HMRC guidelines from April 2023.
Though some of the reform you’ll read here is now acknowledged within the R&D landscape, there are new details that help to identify the governing conditions and caveat to these rules.
And what with the crack-down on R&D claim legitimacy and compliance from vigilant HMRC inspectors, it’s important to understand the fine print.
R&D Tax Relief Reform
📲 Cloud computing and data will be introduced as qualifying costs in April 2023
The government’s previous announcement that R&D Tax Reliefs would be reformed to include cloud and data costs as qualifying expenditure has been confirmed.
Chancellor Sunak has clarified that “all cloud computing costs associated with R&D, including storage, will qualify for relief.”
📍 Refocusing R&D support to within the UK still stands, with newly mitigating circumstances
The government remains committed to refocusing support towards innovation in the UK, ensuring that the UK more effectively captures the benefits of R&D funded by the initiative.
Further conditions have been placed on this guideline, however, with the recognition that there are some cases where it’s necessary for the R&D to take place overseas.
It’s been assured that the 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 will be included as qualifying costs from April 2023
To align the R&D Tax Credits initiative with the growing volume of R&D underpinned by mathematical advances, R&D Tax Relief will include pure mathematics as a qualifying cost from April 2023.
Where required, legislation will be published in draft before being included in a future Finance Bill to come into effect in April 2023.
The Spring Statement clarifies the addition of eligible mathematic expenditure; “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.”
🚀 New changes are being implemented, in addition to those outlined in November
A new item on the Spring Statement agenda is modifying the R&D Expenditure Credit (RDEC) Tax Credit Scheme to make it more internationally competitive.
Sunak announced that in autumn the government will consider whether to make the R&D Expenditure Credit more generous.
As it stands, RDEC is less lucrative for companies than the SME Scheme, which is justified by the greater financial stability of RDEC applicants.
So why are they considering this? Well, research indicates that the RDEC Tax Relief Scheme yields better returns: “for every £1 of tax relief claimed, it stimulates £2.40 – £2.70 of further R&D expenditure. In contrast, the SME scheme only stimulates £0.60 – £1.28.”
🚫 Combating abuse of the R&D Tax Relief Scheme
In addition to making the RDEC scheme more rewarding, the government will consider additional strategies to combat the abuse of R&D Tax Reliefs, which has become particularly prevalent in the SME R&D Tax Credit Scheme.
These efforts are not new, with a recent mass-recruitment of HMRC inspectors dedicated to throwing out fraudulent claims: “The government announced in November the creation of a new cross-cutting HMRC team focused on tackling abuse of these reliefs.”
As of the Spring Statement, the chancellor maintained that they will continually review abuse of R&D tax reliefs, with further measures to be made in the autumn.
💰 Commitment to invest £20bn into Research and Development maintained
The Spring Statement revealed a new ‘Tax Plan’ with three key incentives based on capital, people, and ideas.
This included the ambition to create the conditions for increased economic growth in the UK through greater funding for R&D, helping to nurture technological and scientific breakthroughs.
It also includes a continued commitment to increase R&D spending to £20 billion a year by 2024, which demonstrates a £5bn increase on current funding.
It’s likely that the Autumn Budget will raise itemised legislation surrounding the chancellor’s ambitions about fuelling UK innovation, to give the statement more concrete meaning.
The Spring Statement has certainly clarified some of the impactful changes raised initially in November – most notably perhaps, the acknowledgement that for certain areas of R&D, it’s necessary to conduct activity overseas. And therefore, these areas will not be disadvantaged by cutbacks.
Interesting cases were made for potential changes to the RDEC scheme, with an increased proportion of claimable expenditure likely to be outlined in the Autumn Budget announcement.
If you’re wondering whether any of the issues raised in the Spring Statement will affect your R&D Tax Credit claims moving forwards, it’s best to get ahead and talk it through with one of our R&D Specialists.
Even though this legislation won’t be implemented until April 2023, we may be able to advise you on how to pre-empt these changes, and maximise the size of your future R&D claims.
To speak with one of our R&D Tax Experts, schedule a free claim consultation here.