Promising signs of R&D reform for a digital age

18 September 2020

The Government launched what is its third consultation on research and development (R&D) tax reliefs of 2020 in early July, which if nothing else, shows the appetite it has to maintain the UK R&D tax relief regimes as relevant and valuable incentives to support UK Plc.

Reflecting modern trends
In this latest consultation, the Government is looking at the scope of qualifying costs to reflect modern trends in R&D, specifically with a view to understanding what types of costs are fundamental to R&D, but currently don’t qualify. Cloud computing, hosting, access to datasets and other software related expenditure is at the centre of this – but HMRC and the Treasury will need to tread a careful and balanced line to modernise the regime for digital businesses without prejudicing more traditional business models (for example, if data hosting costs are to be allowed, which are akin to ‘online rent’ – then why shouldn’t rent itself be an allowable cost?). Central to HMRC’s review is to ensure that the changes are broadly cost neutral and so, inevitably, any extension to the qualifying cost categories here may result in a restriction in other areas – tightening the definition of indirect qualifying activities looks to be one area in focus.

Preventing abuse
Consultations on R&D tax relief earlier in the year focussed on the SME regime and, in particular, on countering perceived abuse from a minority of claimants seeking to access payable R&D tax credits through artificial structures. The Government proposes reintroducing a PAYE cap on R&D claims, set at three times the company’s total PAYE liability in the year, with the consultations designed to listen to the voices of businesses and the adviser community alike, to ensure that this cap doesn’t unfairly prejudice genuine claimants with low PAYE bills (for example, start-ups where founders aren’t drawing a market rate salary). 

Getting your voice heard
These are complex and challenging times for businesses, and R&D tax incentives are a lifeblood for many, so whilst these reforms are welcome in the main, care is also needed to protect what already exists. The current consultation closes on 13 October. RSM will be responding, but affected businesses are also encouraged to make their own representations. 

For more information please get in touch with James Tetley, or your usual RSM contact.