Reform of R&D tax relief

In Spring 2021, the government announced a review of R&D reliefs with the objective of ensuring the UK remains a competitive location for cutting edge research and that the tax reliefs provided to businesses continue to be fit for purpose.  

In November 2021 the government set out a series of initial measures to reform the R&D tax relief system, which included the expansion of qualifying expenditure to cover data and some cloud computing costs, as well as refocusing R&D relief on activity carried out in the UK.  (UK companies claimed tax relief on £47.5 billion of R&D expenditure in 2019, but the ONS estimates that businesses only carried out £25.9 billion of privately financed R&D in the UK).

The Spring Statement announces further detail on these measures as well as a further change to expand qualifying expenditure to cover R&D underpinned by pure mathematics.

 

R&D undertaken overseas

The Chancellor said that the government remains committed to refocus support towards innovation in the UK, ensuring that the UK more effectively captures the benefits of R&D funded by the reliefs.  However, he recognised that there are some cases where it is necessary for the R&D to take place overseas.  

The government will, therefore, legislate so that expenditure on overseas R&D activities can still qualify where there is a material or regulatory requirement for this work to be carried out overseas. 

A material requirement could relate to geography, environment, population or other conditions that are not present in the UK and are required for the research – for example, deep ocean research.  A regulatory requirement or other legal requirement that activities must take place outside of the UK could apply to clinical trials for example.

 

Mathematics included

The government recognises the growing volume of R&D being undertaken which is underpinned by pure mathematics. The Spring Statement announces an expansion of the qualifying expenditure to include all mathematics.  

This reform is intended to 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.

 

The effectiveness of the reliefs

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 the tax subsidies incentivise companies most effectively to invest in additional R&D.

 

The generosity of RDEC

In the Autumn the government will consider increasing the generosity of RDEC claims, with the aim of rebalancing the schemes and making RDEC more internationally competitive.

 

Abuse of R&D tax relief

In addition to making the RDEC scheme more attractive, the government will consider what more can be done to tackle the abuse of R&D tax reliefs, particularly in the SME scheme, ahead of the Budget in Autumn 2022.  

The government announced in November 2021 the creation of a new cross-cutting HMRC team focused on tackling abuse of these reliefs.

 

Further reform

The Spring Statement describes these changes as important initial reforms.  The government is continuing the review of R&D tax reliefs, to ensure the UK’s R&D tax reliefs are as effective as possible and deliver the best possible value for taxpayers. 

Further announcements will be made in the autumn.

Where required, legislation will be published in draft before being included in a future Finance Bill to come into effect in April 2023.

 

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