As part of this years' spring budget, Rishi Sunak announced an R&D Tax Relief Consultation. As a tax relief scheme that costs over £5 bn. a year, it makes sense to stop and check it is money well spent. Zest welcomes the consultation - R&D tax legislation is complex, and it impacts a wide cross-section of the UK economy. Reforms that can reduce complexity and enhance the impact of the schemes are important. But these kinds of changes can't be properly addressed without consultation with companies and third parties using the scheme.
So, what does the R&D Tax Relief Consultation say? Are there any areas of focus? And is it possible to tell what changes may be coming up? Read on to find out my view.
Before I go any further - if you want to read the consultation document or consider responding - you can view it here.
It is worth nothing now: the consultation is targeted specifically at R&D Tax Relief. This does not apply to RDA (capital allowances) or investment/research grants. However, within the scope of the consultation, several topics are addressed. I've detailed those which I deem most important below:
The UK is unusual in having separate schemes for large and small companies. Combining the schemes could reduce complexity, making it easier for companies to apply for R&D Tax Relief. However, there is a risk here that large companies with significant resources are provided with similar support to smaller businesses. For smaller companies, performing R&D can be a much more risk intensive exercise. For this reason, they are currently rewarded with a higher rate of relief. The consultation suggests that different rates of relief for smaller companies within any new system may help to address this.
One of the governments key performance measures for R&D Tax Relief is 'additionality'. This is a measure of the extra private expenditure invested in R&D for each £1 of public funding. The government believes the additionality from the SME Scheme has decreased as the rate of relief has increased. This may indicate plans to reduce the rate of relief for the R&D Tax Credit scheme.
Part of the purpose of the R&D Tax Relief Consultation is to ensure the UK is a competitive location for R&D activities globally. Some of the areas permissible for R&D tax relief in other countries include pure mathematics, the creative industries, and social sciences. The government has asked for views on whether the inclusion of these areas in the scope of R&D tax relief could drive further R&D.
Asides from changing the scope, the consultation also refers to industries that could be targeted with higher relief. An obvious area that could be considered is green technologies. If effectively targeted, this could be a powerful way to boost a green recovery.
A persistent issue with R&D Tax Relief is that claimant company are primarily based in London and the South East. in 2018/19, 45% of all claims and 60% of the total amount claimed were from head-offices in these regions. The government is looking for views on whether R&D Tax Relief could play a role in better dispersing this activity. Whether any policies could be developed to effectively address this issue is a more difficult question. Hopefully, this question is more than a tick-box exercise.
Many countries have a broader definition of eligible costs for R&D Tax Relief than the UK's. To aid any decisions, the consultation is asking whether the inclusion of these types of costs would influence investment decisions. Depending on the response, this could lead to a significant increase in the costs considered eligible for R&D Tax Relief.
As previously stated, the R&D Tax Relief consultation is wide-ranging, and there are other areas being considered that aren't listed above. There is a possibility that the consultation is a pre-cursor for planned changes. Perhaps a simplification, and a reduction in the generosity of R&D Tax Relief, particularly for SME's. However, changes in the definition of eligible costs could ensure claimants can continue to recover significant costs. I believe the review is asking important questions. But I just hope that the government is committed to listening to the input to the consultation. And more importantly, to continue to provide generous support to UK companies committed to innovation.
For now - Zest will work with clients who may have important perspective to offer to the consultation, and eagerly await the results
Find out how how companies can meet the deadlines for R&D tax credit claims and all the key R&D tax relief changes coming into place in 2023.
Costs involved in R&D are tax deductible and there are two ways in which R&D costs can reduce a companies Corporation Tax liability. Firstly – with the usual deduction of 100% of the cost from your companies profits. In addition, the R&D Tax Credit scheme allows a further deduction of 130% of eligible R&D costs, […]
Chancellor Jeremy Hunt has announced a series of changes to the UK research and development (R&D) tax relief regime, including a cut to the deduction and credit rates for the SME scheme, the R&D tax credit. The rate of the large company scheme, the R&D expenditure credit (RDEC) will be increased from 13% to 20%, […]