Chancellor’s Autumn Speech – RD Tax Credit incentives
HMRC remain concerned at the continued abuse of the RD tax credit scheme and rightly so. Whilst striving to improve its effectiveness, the Budget announced further reform markers to encourage innovative companies to bring their RD operations onshore (see below, 2.750. The UK is certainly well equipped through its network of UK Science Parks and Innovation hubs to meet this move, but start up and SME companies are always cost driven and we would expect to see measures limiting any reforms to ‘large turnover’ RD companies. It is vital smaller companies have access to low cost skill centres.
Reforming UK R&D tax reliefs
2.72 The UK tax system provides very generous support to encourage companies to conduct R&D activity, worth 0.25% of GDP in 2018 compared to an OECD average of 0.1% of GDP. 46 However, UK businesses invest less than half the OECD average in R&D.
2.73 Following the consultation launched at Spring Budget 2021, the government is announcing reforms to R&D tax credits.
2.74 To ensure the R&D tax reliefs continue to support cutting edge R&D methods, the government will expand qualifying expenditure to include data and cloud computing costs, reinforcing the UK’s status as a science superpower.
2.75 While UK companies claimed tax relief on £47.5 billion of R&D expenditure in 2019, the ONS estimates that businesses only carried out £25.9 billion of privately-financed R&D in the UK.47 This gap is partly explained by companies being able to claim for activity taking place overseas. This suggests that the UK is not effectively capturing the benefits of R&D funded by the UK taxpayer through the reliefs. Many other countries, including Australia and the USA, do not offer relief for R&D activities performed overseas.
2.76 To more effectively capture the benefits of the reliefs, including improved skills, know-how and understanding, the government will refocus the reliefs towards innovation in the UK.
2.77 The government will also set out plans to tackle abuse of and improve compliance with the R&D tax reliefs later in the autumn.