05 March 2021

Budget 2021: What does it all mean for R&D?


Tax Reliefs (including R&D)

The Chancellor’s 3 step plan towards economic recovery was announced this week, and on the whole it’s good news for innovation. Not only did the Budget include a surprising introduction of a 130% super-deduction to accelerate investment, but it also included some changes that will impact Research and Development Tax Relief that business owners need to be aware of.

Increase in Corporation Tax rates

The main rate of Corporation Tax is set to increase to 25% as of 2023, which will only apply to companies with profits exceeding £250,000. While this significant hike may seem daunting at first glance, the higher rate will increase the effectiveness of R&D relief under the SME scheme. Meaning that the scheme will be even more financially beneficial to tax-paying profitable companies, by boosting the rate of effectiveness from 24.7% to 32.5%. This is good news for those who are currently claiming R&D Tax Credits and will incentivise more businesses to start innovating and to take advantage of the scheme in the years to come. However, it’s worth noting that the increased tax rate will have a negative impact on the effectiveness of the RDEC scheme. Those who claim under this scheme will see the effective benefit drop from the current 10.5% to 9.75% when the new Corporation Tax rate is implemented.

The SME cap comes into play

The SME cap for payable credit claims was announced back in November, and aims to tackle the growing cases of R&D fraud and improper claims. The Budget confirmed that the cap will definitely come into effect as of 1 April. This new measure will limit the amount of R&D tax credits that SMEs can claim to £20,000 + 300% of all PAYE and NIC paid by the business. The cap extents to the liabilities of related parties and groups (as long as they are attributable to the R&D project in question) meaning that businesses can really maximise the value of the credit being claimed.

Consultation on qualifying costs

The consultation on the scope of qualifying costs for R&D ended on Wednesday, meaning that we could see costs of data acquisition and cloud computing being added to the list of eligible R&D costs in the near future. But the addition of these costs could come at the price of giving up other indirect costs which currently qualify for relief. Overall, this update would have a positive impact on the scheme, making it more fit-for-2021 and the ever-changing R&D environment.

Potential reform of R&D schemes

A new consultation on the effectiveness of the R&D regime was opened this week, to determine whether any further changes are needed. The consultation will specifically look at how the SME and RDEC schemes operate; whether any changes are required in order to remain competitive with other countries; and if the definition of R&D and the rates of relief are still effective. The closing date for the consultation is June 2nd, so we can expect to find out if any further changes to the scheme are due within the coming months.

Unlock cash in your business

Innovation is going to be crucial in the year ahead as businesses look to recover from the pandemic, and the Budget’s announcements and the R&D scheme will help to drive investment and innovation in the UK forward. If you need support with your R&D tax credit claim, please get in touch with our tax incentives and reliefs team who are on hand to help.