R&D tax credits are celebrating their 21st birthday this year, and there’s a growing interest from many SMEs in this previously underused tax relief. But will the changes to the R&D tax relief regime announced in Autumn Budget 2021 help to boost this interest, or undermine it?
We’ve taken a look at the potential impact of the changes in scope to the relief, and have highlighted the potential pros and cons for your business clients.
The key changes to the R&D system
Latest figures from HMRC show that there was a 16% rise in R&D tax credit claims for the year ended in March 2020. This positive increase shows that business owners are gradually beginning to realise the importance of this credit as part of the tax planning process.
However, the Autumn Budget & Spending Review introduced two key changes to the system:
- Changes to the scope of the relief – R&D expenses classed as ‘data and cloud costs’ now fall within the scope of the relief, a change that’s been widely welcomed.
- Changes that result in a more UK-centric system – a less welcome change is that companies must now carry out their R&D activity within the UK for it to qualify.
On the surface, these may seem like small amendments to the existing R&D rules. But when you start to run through the potential implications, there are pros and cons that could have a meaningful impact for your clients.
The good news: greater scope for claimable expenses
Under the current R&D rules, any data management, analytics and cloud computing costs incurred in the course of your client’s R&D work fell outside the scope of the relief. When you take into account the heavy use of cloud-based systems and software-based data analytics by the average tech-savvy business, this was a glaring oversight in the existing legislation.
TechUK, the UK’s technology trade organisation, had been calling for a change to the scope around data and cloud costs since 2017. Following a full-scale consultation in March 2021, the Government has listened to the feedback and has agreed to extend the scope to cover data and cloud expenditure from April 2023 onwards.
Clients will be able to claim R&D expenditure against:
- Digital transformation projects – moving businesses over to digital systems and infrastructure is a vital part of getting the UK ready for a digital future. Once the scope of R&D relief is extended, this will help to reduce the costs of digital transformation.
- Investment in cloud-based software – the pandemic has pushed many businesses into using cloud solutions and online working tools. Costs from investment in cloud accounting, cloud CRM systems and cloud communications etc. will soon be factored into clients’ R&D claims, reducing the cost of switching over to online working.
- Data analytics and research costs – the data processing and analytics costs involved in development projects can start to eat into the R&D budget. By including these data costs in the client’s R&D claim, the business will be able to make full use of the data processing tools that are available, with fewer concerns about the budgetary impact.
The bad news: a UK-centric R&D system
Focusing investment and business spending in the UK, rather than overseas, was key to this year’s Autumn Budget, and the driver behind the second change to the R&D system.
HMRC has previously estimated that overseas R&D expenditure for the year ending March 2018 came to between £4 billion to £7 billion. Further research is being undertaken to produce an updated estimate, but it’s clear that a significant amount of R&D expenditure is failing to be invested back into the UK economy. To curb this overseas spending on R&D costs, from April 2023, UK companies will only be able to claim for R&D expenditure that takes place in the UK.
On the surface, this seems like a sensible move by the Chancellor – encouraging UK businesses to use UK-based suppliers when it comes to their development projects. But this UK-centric approach to expenditure could have some unintended consequences which you may want to raise with your clients in good time before April 2023.
Key issues include:
- Issues for R&D projects that rely on overseas collaboration – many sectors rely on cross-country collaboration to achieve their development goals. Where sectors have well-established cross-territory operational processes, such as Life Sciences, for example, having to switch to a purely UK-based model could cause real problems.
- Higher expenditure on UK-based development projects – a UK company’s decision to use a research company in Asia, or a production facility in Eastern Europe may well have been driven by cheaper costs. If all qualifying R&D activity must take place in the UK, this could well push up the overall costs and budget for the project.
- A smaller pool of specialist talent – many UK businesses rely on global talent to provide the specialist expertise and services needed for developments in science, technology, medicine and other key sectors. If all R&D activity must take place in the UK and expert specialists are unwilling or unable to relocate to the UK, this could result in fewer options when sourcing the right people for the job.
Making use of R&D tax credits before the changes take place
The details around the changes to the UK’s R&D system remain vague. While we wait for the outcome of the recent R&D consultation document, and further information on the specifics of the changes to the scope and territory rules, it makes sense to talk to your clients now about their R&D plans, the potential impact of the proposed changes, and how it could affect them.
At Capitalise, we make it as straightforward as possible for your clients to apply for R&D tax credits against their qualifying projects and expenditure. A successful claim helps to free up capital and drive investment back into the client’s business. And with recovery and growth high on the agenda for 2022, now is the ideal time to start these R&D conversations with clients.
The sooner you kickstart these discussions and get R&D tax credit applications underway, the sooner your clients can start benefiting from this relief and the boost to their development plans.
Get in touch to see how we can help your clients R&D plans
- Call us on 020 3696 9700