Article / 17 Nov 2021
The Chancellor used the budget to reiterate his belief that research, and development is vital to the UK’s long-term prosperity, which is why it’s important that businesses know about the R&D Tax Credits he announced.
There are many reasons why the UK’s tax system is so generous, to encourage companies to conduct R&D activity. Recent HMRC figures show there are over 82,000 companies claiming this tax relief, which is a total benefit of over £7 billion.
It was announced that from April 2023 the scheme will expand the definition of qualifying expenditure to include the costs of accessing datasets, and licensing computer software that’s hosted in the ‘cloud’.
Currently, the R&D tax credit scheme has been open to claims for work done abroad. However, recent statistics show that UK companies are claiming £47.5bn of tax credits but only spending £25.9bn on R&D. The government attributes this £21.6bn gap to the fact that business is being done outside the UK.
The government suggests that the ability to claim UK tax relief for R&D done overseas costs the UK taxpayer hundreds of millions of pounds a year. But it does not sufficiently boost R&D spend by UK businesses. In contrast, many similar schemes in other countries, including Australia and the USA, do not offer relief for R&D activities performed overseas.
So, changes are expected to the scheme to refocus the reliefs towards innovation in the UK. The actual detail of how the change will work has not yet been announced.
The government will shortly set out their plans to tackle abuse of, and improve compliance with, the R&D tax schemes.
Any change to the ability to claim for overseas development work could reduce the amount that is available to be claimed through the R&D tax schemes by many UK companies. We would hope that the new system does not exclude all overseas work, but maybe a reduced proportion being claimable would be a possibility.
Adding data and cloud computing costs was very much an expected announcement. We hope this will be the start of ongoing reviews of the qualifying expenditure areas to bring them more up to date with modern business practices, given that the current categories of spend were set in stone in 2000.
Tackling abuse of the scheme is in our eyes very important and we are pleased to see this being looked at because there is widespread consensus that a number of claims are probably being paid that do not meet the scheme’s criteria. HMRC have recently employed more staff to ensure that this generous tax benefit is correctly claimed and properly focused where it is really needed to stimulate genuine innovation. Advisers are already reporting an increase in the number of enquiries relating to R&D claims, which is nothing to fear if the claim has been prepared to appropriate professional standards and is in line with the scheme’s qualifying criteria.
The abuse of the scheme is not just down to companies misunderstanding or trying to bend the rules. Regrettably, it would seem that many have been wrongly advised about what can be claimed through the scheme. We would welcome the government bringing in stricter controls over who can offer advice on the scheme and the standards that must be met.