The Spring 2021 Budget and R&D Tax Credits scheme

Last month, Rishi Sunak gave a fair amount of attention to the R&D Tax Relief scheme in his Spring Budget 2021 address and announced a consultation that will potentially make meaningful changes to the scheme.

The consultation which was published on 3 March will be concluded on 2 June 2021. It will address topics such as:

•   Whether data and cloud computing costs should be included as eligible R&D expenditure. This topic was carried over from a previous consultation where respondents made a strong case for including these costs.

•   Potential changes that can be made to the scheme to ensure it is “up-to-date, competitive and well-targeted”? This include re-examining the current way in which the scheme is divided into the SME and RDEC schemes.

This is happening against the background of a UK economy that has been ravaged by Covid-19 and  the government’s ambitious target to invest 2.4% of GDP into research and development incentives by 2024. It will be interesting to see how these factors will come into play when the consultation is concluded.

The Spring address also highlighted a more direct change to the scheme that will take effect in April 2023: The increase of Corporation Tax from 19% to 25% for companies with an annual profit of over £50,000  means that their R&D claim values will grow from 24.7% to 32.5% of eligible expenditure.

We have updated our breakdown of how SME claims will be calculated here.

The Treasury’s consultation document also all but confirms our long held view that HMRC does not currently have the resources to review all claims thoroughly and as a result, low-quality claims are often paid out. This ties into a previous report by the ONS that low-quality R&D claims are the main reason for lost tax in the UK. Here are two excerpts from the consultation document:

“There have been growing concerns over the past few years that this system does not provide adequate controls over the allocation of the increasingly large sums of tax reliefs being given for R&D”

“..The 28-day aim gives very little time for HMRC to consider every case in detail, with the result that processing payments becomes a priority, potentially at the cost of other work..”

We think that it is likely that the consultation will result in new (either publicised or internal) initiatives by HMRC to reduce the number of low-quality claims that are paid out. Anecdotally, we are seeing an increasing number of companies approaching us to defend their claims after they trigger an HMRC enquiry.

Conclusion

The Spring budget highlighted the government’s ongoing recognition of research and development as an essential part of economic recovery and growth. It also hints at ongoing initiatives to optimise the scheme and ‘weed out’ elements that that attracts R&D relief without meeting the criteria of genuine R&D.

We will be keeping a close eye on developments and will publish an update on this topic when the consultation is concluded.