Budget March 11 2020 – Changes to R&D Tax Relief

John Moore, March 11th, 2020

Change to the rate of the R&D Expenditure Credit (RDEC)

As expected following the manifesto commitment the Government have  announced the increase of  the rate of the RDEC from the current 12% to 13% for expenditure incurred on or after 1 April 2020.

The RDEC is claimed by those companies that are either too large to be able to claim the more generous SME R&D tax relief or for those SME sized companies that are unable to claim the SME relief due to receiving grants or subsidies for their R&D projects or because they are carrying out R&D that has been subcontracted to them in certain circumstances.

The change will be introduced in the forthcoming Finance bill and is forecast to provide approximately an additional £1,000m in relief over the next 5 years.

Update on the changes to the amounts that SMEs can claim as payable R&D tax credits

The 2018 budget launched a consultation by HMRC to prevent what is sees as abuse of the R&D tax relief for SMEs. We have commented on this in a previous article.

It was expected that these changes to restrict the payable credit to an amount equal to three times the company’s PAYE & NIC would be in place for accounting periods ending on or after 1 April 2020. However many issues were raised as a result of the consultation process regarding the impact of the proposals for the operation of this change on companies that were not involved in abusing the SME relief. There had been no news on the proposed changes since the previous consultation closed. It has been announced today that any changes will be delayed until April 2021. The Government has listened to the consultation views and has announced a second consultation asking for views on changes to the cap’s design, to ensure it targets abusive behaviour as intended while ensuring that eligible businesses are able to access the benefits of the relief.

Consultation on an expansion to  qualifying costs

The Government have today announced that they will be consulting on whether expenditure on data and cloud computing should qualify for the R&D tax relief. These costs have not previously qualified as HMRC consider that they do not meet the definition of a consumable item under the current legislation. These types of costs can be considerable for certain types of software development activities.

Amendment to to Externally Provided Workers rules

Changes will be made to the Externally Provided workers legislation to ensure that the upcoming changes to the status of contractors will not adversely impact on the qualifying costs for the R&D relief. These changes are designed to ensure that claimant companies can continue to claim the same amount of relief for the expenditure of workers supplied to the company involved in the company’s R&D projects.

Our view

The announcement of the proposed the increase in the RDEC relief is welcomed. This will not only benefit larger companies but also those SME companies that for various reasons are unable to claim under the more generous SME regime.

The announcement of another consultation on the operation of a cap on the amount that SMEs can claim as a payable credit is welcome as there were concerns raised that the operation of the PAYE & NIC cap could mean that companies with a legitimately low employee base could lose out on the valuable R&D funding provided by the SME relief. The opportunity for the sector to continue to contribute to the design of the changes via a new consultation shows that Government is listening to the views of the companies that need full access to the payable credit element of the relief.

We have long believed that the costs of data and cloud computing should be included as qualifying expenditure and welcome the intention to consult on the potential inclusion of these types of costs in R&D claims. This will potentially benefit the software development sector where these costs can be significant depending on the type of development being undertaken.

These announcements demonstrate the Government’s commitment to ensuring that the R&D reliefs are fit for purpose and continue to assist innovative companies in the UK.

If you would like to know more about this, or discuss its application to your company, then please contact John Moore on 0207 292 8850 or at 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.