The Chancellor’s spotlight continues to shine on the UK’s R&D tax relief system - and this is no surprise, as there is much that doesn’t add up. 

In the most recent published statistics, R&D tax relief was claimed on expenditure of £47.5 billion, but privately financed R&D expenditure was estimated at just £25.9 billion. The UK has one of the most generous R&D tax relief systems in the world, spending, as a percentage of GDP, more than any other country in the OECD. However, self-financed business R&D in the UK is less than half the OECD average. These disparities will, at least in part, result from the well-documented abuse of the UK R&D tax relief system.  In fact, the National Audit Office qualified HMRC’s most recent accounts due to the level of estimated error and fraud in R&D claims. 

With this in mind, there is no surprise that the Government is continuing to consider what more can be done to tackle the abuse of R&D tax reliefs, particularly in the SME scheme, ahead of Budget 2022 and steps taken to achieve that should be welcomed by all. However, some of the compliance changes that have been mooted (including a proposal to require R&D claims to be pre-notified) have not been well thought through and will benefit from further consultation before implementation, to ensure they have the desired effect without preventing genuine claims. There was no additional detail announced today about these compliance changes, which is an encouraging sign that time is being taken to consider them further. 

On a more positive note, the Government remains committed to enhancing the UK R&D tax relief system and making it both more generous and more effective.  An increase in the rate of the Research and Development Expenditure Credit (RDEC) is being considered. The RDEC is the only form of R&D relief available to large companies and is also claimed by some small and medium companies in respect of funded or contract R&D. We will have to wait for any further announcements on that in Budget 2022. 

Some limited further details were announced in the Spring Statement regarding the modernisation of the R&D tax relief system, adding some small tweaks and further detail to the previously announced expansion of eligible expenditures and re-focussing of the relief towards innovation in the UK. It had already been announced that eligible expenditure would be expanded to include data and cloud computing costs, with effect from April 2023.  However, previous announcements had indicated that data storage overheads would be excluded. It’s encouraging to see that the Government have listened to stakeholders on this issue and now intend to include all cloud costs associated with R&D, including costs related to the storage of data, which is an essential cost for data-heavy research. 

There is also some more detail around the scope of the new territorial restriction proposed to apply for R&D tax relief from April 2023.  This restriction targets subcontractor costs and the costs of externally provided workers, and will prevent relief in the future unless the relevant activities take place in the UK. Some targeted exceptions have been announced today, in recognition that some research, by necessity, must take place outside the UK. The Government will legislate so that expenditure on overseas R&D activities can still qualify where there are: 

• Material factors such as geography, environment, population or other conditions that are not present in the UK and are required for the research; or 
• Regulatory or other legal requirements that activities must take place outside of the UK. 

Finally, one new announcement relates to the actual definition of R&D for tax purposes, which will be expanded to include pure mathematics. It’s always been a bit of an anomaly that pure maths was not included within the definition of science and technology, albeit that mathematical analysis would often be eligible on the basis that it was applied (rather than pure) maths and directly contributed to the R&D project. The change appears to be in recognition that pure mathematics underpins much modern R&D (e.g. artificial intelligence, quantum computing and robotics) and so the distinction between pure and applied maths should be removed.   

For more information or to discuss any of these announcements further, please don't hesitate to get in touch with me or another member of our Innovation Taxes team.