This news item summarises the announcements made as part of the Autumn Budget 2021 on 27 October 2021.
This announcement builds on the results of the two latest consultation exercises on the future of the R&D tax reliefs. These explored how the design of these could be changed to best support the nature of private sector R&D investment in the UK and on changes to the qualifying cost base. Following these there was some expectation that the Government would take the opportunity to announce forthcoming changes to the R&D tax reliefs. Today the Chancellor announced, in broad terms, changes aimed at refocussing the reliefs in order to more effectively capture the benefits and plans to tackle abuse of and improve compliance with the R&D tax reliefs.
New qualifying costs
Following strong support for broadening the qualifying cost base in the responses to the consultation in 2020 the government have announced that the categories of qualifying expenditure will, in future, include data and cloud computing costs. The inclusion of these had been strongly called for in the consultation responses in order to more adequately reflect the types of costs that are key to the changing nature of R&D activities in data driven R&D.
UK based innovation to be rewarded
The government have stated that while UK companies claimed tax relief on £47.5 billion of R&D expenditure in 2019, the ONS estimates that businesses only carried out £25.9 billion of privately-financed R&D in the UK. It concludes that this gap is partly explained by companies being able to claim for activity taking place overseas and that this suggests that the UK is not effectively capturing the benefits of R&D funded by the UK taxpayer through the reliefs. The Autumn Budget document then notes that many other countries, including Australia and the USA, do not offer relief for R&D activities performed overseas.
The government has announced that, in order to more effectively capture the benefits of the reliefs, including improved skills, know-how and understanding, it will refocus the reliefs towards innovation in the UK. There are no further details available at present on the way in which this will be achieved and what the implications will be for those UK claimant companies that carry out R&D activities outside the UK.
Improving compliance & tackling abuse
As part of the changes announced today the government will also set out plans to tackle abuse of and improve compliance with the R&D tax reliefs. Again there are no details available at present.
Timetable and next steps
Today’s announcement states that these changes will be legislated for in Finance Bill 2022-23 and take effect from April 2023. Further details of these changes and next steps for the review process will be set out as part of the government’s further tax administration and maintenance announcements later in the autumn.
The addition of data and cloud costs as qualifying costs is to be welcomed but represents the minimum additions to the qualifying cost base that the consultation respondents were asking for. The advent of some sort of restriction to qualifying R&D activities and costs being only for those carried out in the UK will be more concerning for those UK based companies that need to carry out R&D overseas. It should not be forgotten that this R&D should ultimately benefit the UK company, its employees and the government though the addition of jobs and additional tax take in the UK. We will be closely following the details of these changes as they are published later this year.
It is always our view that any changes made that are successful in improving the compliance process and tackling abuses of the reliefs are welcome and again we will be reporting on these as the details become available.
If you would like to contact us to discuss the potential application of these announcements then please contact John Moore of Kingly Brookes on 0207 292 8850 or firstname.lastname@example.org
This briefing is prepared by Kingly Brookes LLP, a limited liability partnership. For further information on any of the material contained in or referred to in the briefing, please contact us. This briefing note is intended to keep our readers up to date with the developments in this area, but it is a general guide only and is not intended to be a comprehensive statement of the law and practice in this area. No liability is accepted for the opinions it contains or for any errors or omissions.