Here is an analysis of the key points from the Budget that relate to R&D tax credits:
Review of R&D Tax Credits
The major point of interest is that a detailed review of R&D tax credits is to be undertaken by the Government. Initially there is a consultation period where businesses, advisers and other stakeholders have the opportunity to provide submissions by answering 17 questions. The deadline for responding is 2nd June 2021. It will probably be some time after this date that the first indicators of potential change will be known.
The consultation document includes the following statements:
- The Government has an ambitious target to raise total investment in research and development to 2.4% of UK GDP by 2027. R&D tax reliefs have a key role in incentivising investment in R&D by reducing the costs of innovation. It is therefore essential to ensure that the reliefs remain up-to-date, competitive and well-targeted.
- This new consultation will explore further with stakeholders the nature of private-sector R&D investment in the UK, how that is supported or otherwise impacted by the R&D tax relief schemes, and where changes may be appropriate. It will look at:
- Definitions, eligibility and scope of the reliefs, to ensure they are up-to-date and competitive, and that they reflect how R&D activity is conducted now
- How well the reliefs are operating for businesses and HMRC, and whether this could be improved
- Targeting of the reliefs, to ensure that for every pound of taxpayer support, we maximise the value of the beneficial R&D activity for the UK economy
I expect that part of the reasoning for this review is due to the significant increase in claims that have been made in recent years and also the fact that a large number of claims submitted are of poor quality (which HMRC are well aware of). I suspect that ultimately there could be a tightening of the rules in some way to try to ensure that only valid claims are being made. This is going to mean that the quality of claims submitted is going to become significantly more important.
However, it is difficult at this stage to know what the final outcome from this review will be and what the changes to the R&D tax regime will look like. It is very likely that there will still be an R&D tax relief at the end of this review – pretty much every western country has an R&D tax incentive so to not to have one would make the UK less competitive. Encouraging companies to invest in R&D is also a key policy of the current Government.
Key message – Now is a good time to review who prepares your or your clients’ R&D tax credit claims. Do they fully understand and document properly the R&D that is being undertaken?
Further details about the consultation can be found at the following link – https://www.gov.uk/government/consultations/rd-tax-reliefs-consultation.
Legislating for the “PAYE Cap”
The PAYE cap, that was originally mooted in the 2018 Budget, is finally to become law for accounting periods beginning on or after 1 April 2021. The cap is intended to target specific abuse where R&D tax credit claims were being made by companies with little or no UK employees who were claiming for overseas subcontractor costs.
The cap will apply where the payable credit is more than £20,000 plus 3 times the PAYE & national insurance liabilities. There is an exemption from the cap where a company is creating, preparing to create, or managing IP, and where less than 15% of the R&D spend relates to connected subcontractors.
This cap is unlikely to impact the vast majority of claims for the payable credit by normal trading companies who have employees.
Extension to Qualifying Costs
There was also further reference to including hosting and data costs as qualifying costs which was originally raised in the Spring Budget 2020. This will now be considered as part of the wider review of R&D tax credits.
Please note that this analysis is for reference only and is not intended to represent tax advice. If you require any further details about these changes, please feel free to get in touch with me, Ian Farley, on 07752 386 484 or at firstname.lastname@example.org.
We have over 20 years’ experience of preparing R&D tax claims and have a team of Chartered Tax Advisers, engineers, PhD scientists and software specialists. To find our more about our team see – https://www.ianfarley.com/about-us/meet-the-team/.