Budget 2021: The new landscape of R&D Tax relief

Talk to our team

15 March 2021

Sectors:

Education

Services:

Auditing

Budget 2021: The new landscape of R&D Tax relief

R&D tax credits have seen greater uptake from UK companies and are viewed as a key way to reduce costs around investment in innovation; so there is real interest in the government’s recently revealed Budget announcements for a new review of R&D tax reliefs.

In addition to announcing this new review, which will cover the definition of R&D and qualifying expenditure categories, it was confirmed that the results of the previous consultation on widening the scope of qualifying costs will be fed into the second review.

Rewarding innovation

The government has made it clear that the aim of this second review is to positively maintain the UK’s position as a globally competitive location for cutting edge R&D whilst also providing value for money to taxpayers and rewarding investors in innovation. In the context of R&D, there had already been some concerns that the UK leaving Europe could have curtailed or even ended the scheme. More and more companies have become aware of R&D tax relief over the last few years and this led to an increase in applications. The Budget announcement seems to be signalling that the government feels it is time for a reset, a rethink on R&D tax credits and to see if the definition of R&D and rates of relief are still effective.

Inclusion of Digital Solutions

Many hope that, as a result of the previous consultation, the inclusion of data and cloud computing costs in the scope of reliefs will now happen. This would be a welcome change for many growth businesses in this increasingly digital world. The government would appear to agree however at the same time it is likely that they will take the opportunity to question whether certain related administration costs around an R&D function should really be included within the scope of qualifying expenditure anymore.

Value of R&D Claims due to rise

Probably the most significant announcement was that the rate of tax will increase, in 2023, from 19% for companies making profits above £50,000 on a sliding scale, to a maximum of 25% for those with profits of £250,000 or more. This should act as an incentive, for those more profitable companies, to explore the possibility of making an R&D claim. The increase in tax rate will take the value of an R&D claim from just under 25% of qualifying costs, to over 32%.

It was also announced that the cap on the payable credit for the SME scheme will go ahead as part of the Finance Bill 2021. This means the amount of SME payable R&D tax credit (but not reduction in tax due, or repayment of tax paid) that a company can receive in any one year, for accounting periods beginning on or after 1 April 2021, will be capped at £20k plus three times the company’s total PAYE and National Insurance contributions liability. The allowance of the first £20k is a modest concession by the government. This payroll cap only affects companies with very few employees and should not concern the majority of companies. It is aimed at encouraging companies to have more employed staff and fewer contractors, especially those based abroad.

Repairing the pandemic damage

Overall the Chancellor appears to have been fair and reasonable in what he has announced overall in the Budget. No one could deny it will have been a difficult job to try to balance the books in the wake of the unprecedented economic circumstances brought about by the global pandemic. Where possible he has tried to create a soft landing and built in some time for people and businesses to prepare for the additional costs that most would acknowledge will be needed to pay for the financial impact of the crisis. In this context, likewise some of the expected decisions on the future shape of R&D relief have been punted down the road again; but it does seem that this second consultation will lead to more definite changes in the near future and companies should keep track of the changes that could affect them.