Going into Budget 2020 I was expecting three things: an increase in the rate of the Research and Development Expenditure Credit (RDEC); more details on the proposed PAYE cap on the amount of the payable R&D tax credit; and potential broadening of the eligible cost categories to include cloud hosting and data costs.   

All of those are covered in the documents published today.  However, the headlines will be taken by the huge investments announced today, with plans to increase public R&D investment to £22 billion per year, so we’ll start there.   

Investing in innovation 

The Government’s support for innovation pervades Budget 2020, with science, innovation and technology forming the core of the UK’s investment strategy.  Public R&D investment will be increased to £22 billion per year by 2024-25.  This is the most significant increase ever made in support for R&D, with high-potential target areas including: nuclear fusion technology; space, electric vehicles; and life sciences. 

The proposal that most caught my eye was the £800 million investment in a new blue-skies funding agency, modelled on the United States’ Advanced Research Projects Agency (ARPA).  ARPA is an American funding body set up by President Eisenhower that has gained almost mythical status.  It was created to make pivotal investments in breakthrough technologies for national security but has famously helped develop ground-breaking innovations such as the internet, GPS and self-driving cars.   

The UK’s high-risk research agency would fund similar high-risk, high-reward research in emerging fields.  This may present a step change from the traditional R&D grant model, where the team with the most credible proposal (the “safest bet”) is selected and funded.  Instead the agency could engage multiple teams to compete to develop more radical solutions and develop unproven technologies. 

Increase in the RDEC rate from 12% to 13% 

This is the latest in a series of incremental increases over the years.  We had been expecting it (the increase was in the Conservative party manifesto) but it’s very welcome.  For one thing, it shows the continued support within Government for the UK’s R&D tax incentives.   

RDEC is the form of relief claimed by large companies, but it’s also claimed by SMEs carrying out contract or subsidised R&D.  The increase will apply for expenditure incurred on or after 1 April 2020. 

Good news on the PAYE cap for SMEs 

The Government has listened to the representations from industry (and ourselves) and the introduction of the PAYE cap on the payable R&D tax credit will be delayed until 1 April 2021.  As originally proposed, the cap would have had significant impacts on genuine companies, especially start-ups in the life sciences and tech industries.  The delay allows more time to consult on the detail of the rules, to ensure the cap targets abusive behaviour as intended, while ensuring that eligible businesses are able to access the relief. 

Broadening the categories of eligible costs 

The Budget also makes brief mention of the review of R&D eligible cost categories, to potentially include cloud hosting and data storage costs.  We are regularly challenged by companies undertaking software development projects as to why these costs are not eligible.  The answer is simply that the prescriptive rules don’t include them.  Whilst software licence costs are eligible, cloud hosting and data storage costs are not.  These costs can be essential to R&D projects and can be significant, so it’s good to see that this will be revisited and we’re hopeful that the rules will be changed to include these costs (and potentially others) soon. 

Something that’s not in the Budget 

There is one further change which is not mentioned anywhere in the Budget documents.  From 6 April 2020 changes are being made to the rules which relate to workers’ services provided through intermediaries (the off-payroll working rules). These changes could prevent some of the expenditure which R&D claimants currently include in their claims for externally provided workers (EPWs) from qualifying. The legislation bringing in the new off-payroll working rules will include some consequential amendments to the EPW provisions in the R&D rules. These changes to the EPW rules will ensure that claimant companies can continue to claim the same amount of relief for expenditure on R&D.