Budget 2021 – R&D Tax Relief Update

John Moore, March 3rd, 2021

This news item summarises the announcements made as part of the Budget 2021 on 3 March 2021.

Despite much lobbying from interested parties the Budget on 3 March did not contain any measures to legislate for an increase in the R&D tax relief available under either the SME scheme or the R&D expenditure credit (RDEC) scheme. Instead, the previously announced SME cap will go ahead and announcements were made regarding a previous consultation on the widening of qualifying costs to include data and cloud computing costs and of a new review of the reliefs, supported by a consultation with stakeholders.


As expected the previously announced cap on the payable credit for the SME scheme will be legislated for in the Finance Bill 2021. We have previously highlighted the proposed changes to the SME scheme to be brought in in the form of a cap on the amount of payable credit available. In summary, for accounting periods beginning on or after 1 April 2021, the amount of SME payable R&D tax credit that a company can receive in any one year will be capped at £20,000 plus three times the company’s total PAYE and National Insurance contributions liability, in order to deter abuse.  More details are set out in our news item in November 2020 following the publication of the draft legislation.

Further amendments to the SME cap legislation announced on 3 March 2021

Importantly, since that draft legislation was published HMRC have indicated that the following additional changes will be made to ease the introduction of the SME cap:

Where a company has an accounting period (AP) that straddles 1 April 2021, the measure does not apply to the part of the period from 1 April, but instead, only affects the next full period starting after that date. This will give companies confidence that they will not need to apply the new rules to a current AP.

The definition of intellectual property whose management can support the company being exempt from the cap will be widened so know-how and trade secrets are included. This will cover cases where companies are not able, or do not wish, to protect the results of their R&D.

Our view

The additional changes announced today are welcome and we look forward to additional guidance on the meaning of “management” of intellectual property.

Previous consultation of the scope of qualifying expenditures

This was carried out in October 2020. Having analysed the responses from 50 respondents, including Kingly Brookes, the government have published these and have concluded that the decision on whether data and cloud computing costs will be brought into the scope of qualifying expenditure will be taken alongside the wider review of R&D tax credits that was announced at budget, and is currently being consulted on (see below).

The government appears to agree with many of the respondents that there is a strong case for bringing data and cloud computing costs into the scope of the reliefs. It has said however, while consulting on this narrower measure, there were calls to consult wider, and launch a holistic review of R&D tax reliefs to ensure they remain fit-for-purpose in a rapidly changing R&D environment. It will now consider bringing data and cloud computing costs into the scope of relief alongside a number of other policy options and priorities. This will allow the government to ensure that any policy changes provide support to businesses across the economy in a fair way and that taxpayer money is effectively targeted towards activities that drive the best outcomes for the UK economy.

New consultation on R&D tax reliefs

The government has stated that it is important to ensure that the reliefs remain up-to-date, competitive and well-targeted. As part of Budget 2021 the government has announced a review of the reliefs, supported by a consultation with stakeholders.

This consultation will explore the nature of private-sector R&D investment in the UK, how that is supported or otherwise influenced by the R&D relief schemes, and where changes may be appropriate. The closing date for this consultation is 2 June 2021.

We will be contributing to this consultation and if you would like your views to be represented as part of our submission then please contact us.

If you would like to contact us to discuss the potential application of these announcements or the cap to your claim process, or would like us to make representations as part of the consultation 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.