The Autumn Budget that Rishi Sunak delivered on Wed 27 Oct ushered in some significant changes to the R&D Tax Credits scheme. It also hinted that even bigger changes may be around the corner for companies that utilise the scheme – particularly for those that contract their R&D work to overseas companies.
There has been a government consultation centred around the R&D Tax Credits scheme for some time and we are now starting to see the first set of practical decisions being made with regards to overhauling it.
The good news is that from April 2023 companies will be able to include both cloud computing costs and data costs in their R&D claims when they contribute to an R&D project. This will no doubt provide a welcome boost to companies that invest significant amounts in their digital infrastructure and will be relevant to sectors such as software development, technology consulting, engineering, architecture and even construction.
On a less positive note, Sunak also announced plans to implement changes that are likely to only favour companies that carry out R&D activities within UK borders. Here is a quote from the Autumn Budget speech:
“…The second problem is this: Companies claimed UK tax relief on £48bn of R&D spending. Yet UK business investment was around half of that, at just £26bn. We’re subsidising billions of pounds of R&D that isn’t even happening here in the United Kingdom. That’s unfair on British taxpayers.
And it puts us out of step with places like Australia, Canada, Hong Kong, Singapore, Switzerland and the USA who have all focused their R&D tax reliefs on domestic activity. So from April 2023, we’re going to do the same, and incentivise greater investment here at home.”
While there are currently no details about the specific rules that will be in place to enforce this, it seems reasonable to assume that where a subcontractor or externally provided worker is based overseas, this will no longer be claimable. It is unclear at this stage whether or not this will apply to both connected and unconnected parties.
On a larger scale, the Government’s previous target of spending £22 billion on research and development by 2024-25 was revised to £20 billion. This delay in spending makes it unlikely that the target for total investment in R&D of 2.4% of the UK’s GDP will be reached by 2026-27.