In his Autumn Budget on October 27th, the Chancellor made a great fuss about increasing R&D expenditure, including the tax relief plan. However, there is scant information on how this will work in practice. It remains to be seen if this will benefit UK enterprises.
There is already an anti-avoidance system in place for SME claims. This limits the amount of any payable Research and Development (R&D) tax credit to £20,000 plus 300 percent of the total PAYE and NIC due for the period, with limited exceptions. This applies to accounting periods beginning on or after April 1, 2021.
To ensure that R&D tax benefits continue to encourage cutting-edge R&D approaches, the government will widen qualifying expenditure to include data and cloud computing expenditures, further strengthening the UK’s status as a research powerhouse.
In his Autumn Budget, Rishi Sunak highlighted emphasizing R&D effort in the UK on innovation. While UK firms received tax advantages on R&D investment of £47.5 billion in 2019, the ONS estimates that only £25.9 billion was spent in the UK. It links a significant chunk of the discrepancy to actions taking place in other nations.
We can only assume from this, in the absence of other information, that expenditure on subcontract labor and external personnel situated outside the UK would no longer be eligible for relief, or will be eligible for relief at a substantially lower rate than the current 65p for every £1 spent (subject to the rules on connected parties). Any testing or other physical R&D operations undertaken outside the UK may also be rejected, but this is doubtful.
“From a fiscal aspect, it’s clear why this seems to be an improvement from the government’s perspective,” said Diane Deller, Senior Tax Manager at TaxAssist Accountants. In fact, though, this is likely to be bad news for many SMEs. Huge amounts are being spent on IT projects, for example, in India, where there is a large and highly skilled workforce. The government’s belief that this could be replaced instantaneously by personnel in the UK is wishful thinking.”
The detailed proposals are likely to be unveiled later this autumn and will take effect in April 2023. We’ll keep an eye on the plans and publish an update as soon as further information becomes available.