The future of R and D tax reliefs

Since its introduction in 2000, R&D tax reliefs have seen significant increases, both in terms of their cash value and the breadth of qualifying activities.

Currently, an SME can claim an additional deduction of 130 per cent on qualifying R&D spend, which can equate to 24.75 pence in the pound (with scope to surrender for cash back in certain cases where losses arise, albeit at a different rate). Claimants under the large company regime (RDEC) are entitled to a taxable credit of 13 per cent, giving a net benefit of around ten pence in the pound on qualifying R&D spend.

The reliefs are available to all companies in the tech sector, and recent examples of R&D include creation of new platforms built from the ground up and integration of disparate technologies, as well as advancements in artificial intelligence (AI).

Tech takes centre stage in proposed reforms

With technology in mind, a specific consultation on IT-related costs began in 2020. This intended to address the increasing digital expenses such as hosting, data etc, whereas currently relief is restricted to annual software licenses.

This indicates the Treasury recognises the changing way businesses now operate, and is embracing the digital economy by widen the qualifying spend criteria.

This is however tempered by a proposed cap on SME cash-back claims. The cap mostly impacts companies that have significant R&D spend on non-staff costs, including the use of external resources.

In many cases, this will have no impact on the cash repayment. However, companies may be affected if the level of payable credit is above £20,000 and exceeds x3 of the company’s total PAYE/NIC liability for the period.

In particular, the impact of this cap may be relevant for small technology companies and start-ups with few UK staff, who leverage external developers for their R&D projects and may make use of the pools of technology talent overseas.

Legislation is yet to be brought in, although this seems likely to apply for accounting periods beginning on or after 1 April 2021.

Reforms on the horizon

These proposed reforms are also reinforced with the more wide-ranging R&D consultation currently underway. The government is seeking an ambitious boost in R&D investment to 2.4 per cent of UK GDP by 2027, and targeted reliefs can help incentivise companies to undertake R&D activity.

The aim is to ensure the UK remains a competitive location for business to operate and indeed thrive. The continued success of the UK’s tech sector is key to this, and can only be achieved by attracting and retaining businesses in the UK – and providing the framework to enable profitable growth. Any improvements to the R&D tax regime will feed back into the economy, by providing more funds for tech companies to invest in development.

All aspects of the regime are under review, including the rates of relief. Hopefully these will be revised upwards – certainly, for claimants under the RDEC regime, the benefit will otherwise drop once the corporate tax rate increases from 1 April 2023 (as the R&D credit would be taxed at this higher rate, leaving a lower net benefit for the claimant).

Other areas referenced in the consultation are;

what costs could be included in R&D claims
should there be an emphasis on green technology
can the claim process be enhanced; and
whether reliefs for capital expenditure can be improved.

Capital spend

For the tech sector, there is often significant investment in new computers, servers or even buildings. There is currently a form of first year R&D allowance which gives tax relief in the year of spend. However, there are other non-R&D reliefs which also give similar benefits. To make any new R&D-based relief more meaningful, some form of cash credit may need to be considered as part of the consultation.

What happens next

From being at the heart of these consultations and holding discussions with technology companies, we can see genuine excitement about the potential for change within the R&D regime.

Conversations ranged from how to incentivise capital spend to speeding up the claim process and increasing rates of relief.

RSM is focused on ensuring this relief remains accessible and of benefit to all. We have submitted a response to the Treasury on this wide-ranging consultation, to further improve on this valuable tax relief, both for the technology sector and more broadly.

Given HMRC has opened this consultation, we are hopeful of positive change and will update on this in a further article.

If you would like to talk through what this consultation could mean, share your views, or simply discuss how to make or maximise tax claims, please Matt Appleton or Ross Wilkinson.