Budget for Innovation

The Autumn Statement contains some significant announcements in relation to the UK’s Research and Development (R&D) tax reliefs. These announcements represent a series of initial steps as part of the Government’s review of R&D tax relief launched at Spring Budget 2021. 

The most significant of these is the introduction of a new territorial restriction, limiting R&D tax relief to innovation “in the UK”. There were also more welcome announcements, including the expansion of the scope of qualifying expenditure to include data and cloud computing costs, and much needed measures to tackle abuse and non-compliance. 

These measures will take effect from April 2023, but the detail for each will not be released until later in the Autumn. In the meantime, we have summarised what we know so far:

A territorial restriction on UK R&D tax relief

Data and cloud computing costs

Tackling abuse and non-compliance

A territorial restriction on UK R&D tax relief

During the Chancellor’s speech, he referred to a “problem” with the UK’s existing R&D tax reliefs. UK companies claimed tax relief on £47.5 billion of R&D expenditure in 2019, but the Office for National Statistics (ONS) estimates that businesses only carried out £25.9 billion of privately-financed R&D in the UK. Part of this gap is thought to arise from claims for R&D activities that took place outside the UK (which are currently eligible for relief). 

Whilst a number of jurisdictions (including the US), restrict relief for R&D to activities performed within the jurisdiction, this has not been a feature of the UK regimes. Whilst the UK was part of the EU, it was not possible to include a similar territorial restriction (at least as regards other EU Member States). Now that the UK has left the EU, changes are to be introduced to refocus support towards innovation in the UK. We await the details to see how this territorial restriction will be shaped to achieve the policy objectives, but it could have a significant impact on many companies and groups with overseas staff or operations.

Data and cloud computing costs

The extension of qualifying expenditure to include data and cloud computing costs has been trailed for some time and is very welcome. 

R&D tax relief is currently available for traditional “licenced” software. However, relief is not available for other forms of software costs, such as expenditure on software leased and accessed via the cloud. There has been a general shift away from traditional software stored on in-house physical servers, towards software leased and accessed via the cloud, which can allow companies greater flexibility to flex storage and computing capacity according to need. 

Similarly, there has been a growing importance of the use of data within modern R&D in many areas, such as functional genomics and machine learning. Datasets, such as genomics information from medical samples can be extremely expensive. 

Given the importance of cloud services and data to many modern R&D methods, the inclusion of data and cloud computing costs is a welcome modernisation of the regime. We await the details to see how the boundaries of these new cost categories will be drawn.

Tackling abuse and non-compliance

The Government has committed to set out plans to tackle abuse of and improve compliance with the R&D Tax reliefs. We’re delighted to see this, as abuse of the UK’s R&D tax reliefs has been well publicised and represents a threat to the long-term viability of this important relief.