Spring Statement 2022 – R&D Tax Relief Update

John Moore, March 23rd, 2022

Following earlier announcements and subsequent consultation The Chancellor has continued his reform of the R&D tax reliefs announcing some further details and the intention to consult with industry in the run up to the next budget in the Autumn of 2022 with legislation to be introduced effective from 1 April 2023.

This article examines the Spring Statement announcements in more detail.

R&D tax relief reform

Qualifying costs

The government has previously set out its intention to reform the R&D tax relief incentives to include additional costs and has received, following the consultation exercise, feedback from interested parties on the proposed reforms. These measures included the expansion of qualifying expenditure to cover data and some cloud computing costs.  Today’s Spring Statement states that the government has listened to stakeholders and can confirm that from April 2023, all cloud computing costs associated with R&D, now including storage, will qualify for relief. The Statement notes that this will allow companies to claim for costs related to the storage of vital data, supporting data-heavy research such as genomic sequencing.

In a new announcement, and due to the fact that the current rules specifically exclude pure mathematics as a qualifying R&D activity, the government now recognises the growing volume of R&D being undertaken which is underpinned by pure mathematics. The Spring Statement announces a further proposed expansion of the qualifying expenditure to include all mathematics. The statement notes that 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.

Refocusing relief on R&D undertaken in the UK

Following the government setting out detail of a series of initial measures to reform the R&D tax relief system in November 2021 stakeholders were given to opportunity to feedback comments on the intention to refocus the R&D relief so that, for the SME scheme, where companies subcontract R&D activity to a third party, they will in future only be able to claim relief for that expenditure where that third party performs the work within the UK. In addition for both the SME and RDEC schemes it was proposed that where companies incur expenditure on payments for externally provided workers (EPWs), they will only be able to claim relief on such expenditure where those workers are paid through a UK payroll. Government invited views from stakeholders on whether there was a case for any narrow exceptions to allow claims on some overseas activity. The Spring Statement sets out that Government will legislate so vital R&D undertaken by businesses based in the UK can continue to qualify for tax reliefs where there is a material or regulatory requirement for this work to be carried out overseas.

They have said that these material factors are those 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.

An example is given of regulatory or other legal requirements that activities must take place outside of the UK being for clinical trials.

Refocussing relief to be globally competitive and incentivise innovation

The Spring Statement notes that the UK has one of the most generous R&D tax relief systems in the world, spending, as a percentage of GDP, more than any other country in the OECD. Since 2007 spend has increased from 0.05% to 0.34% of GDP in 2019. Despite this, the UK has not seen the desired results, with self-financed business R&D only rising from 1.0% to 1.2% of GDP, which is less than half the OECD average. The government intends to understand why these figures are so different and what further changes might be needed to ensure that tax subsidies incentivise companies most effectively to invest in additional R&D. In his speech, the Chancellor mentioned that an increase in the rate of RDEC could be made.

Steps to counter abuse

The government has stated that it will continue to consider what more can be done to tackle the abuse of R&D tax reliefs, particularly in the SME scheme, ahead of Budget 2022.  It notes that as the Public Accounts Committee and National Audit Office have made clear, abuse of the R&D tax reliefs is an issue that must be tackled. The government announced in November the creation of a new cross-cutting HMRC team focused on tackling abuse of these reliefs.

The November 2021 proposed reforms included a number of areas for potential change in addition to those mentioned above. These included steps to counter abuse and regulate the compliance processes associated with R&D claims. These included proposed changes to the detail required in the claim at the time of filing, the need for a senior officer of the company to endorse the claim made and, perhaps most contentiously, a requirement for companies to inform HMRC in advance that they plan to make a claim. Feedback was received from stakeholders on these points as well although no further details have been announced at this time as part of the Spring Statement.

Timetable & next steps

The government is continuing the review of R&D tax reliefs and has stated today that further announcements will be made in the autumn. This will follow further work with industry over the rest of 2022 before announcing the conclusions at Budget 2022.  Where required, legislation will be published in draft before being included in a future Finance Bill, for these measures to come into effect in April 2023.

Our view

We welcome the further clarifications and expansion of the qualifying cost base for the R&D reliefs. We are glad that some of our recommendations made in the consultation process following the November 2021 report regarding the need for all data costs required to carry out the R&D and those regarding the specialised requirements for some sectors to carry out R&D overseas have been included in the Spring Statement. We welcome measures that will effectively reduce abuse of the schemes. We hope that this positive consultation process will continue in the run up to the Budget 2022.

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 john.moore@kinglybrookesllp.co.uk

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.