Reforming UK Research & Development tax reliefs

There is already an anti-avoidance measure in place for SME claims. This limits the amount of any payable Research and Development (R&D) tax credit to £20,000 plus 300% of the total PAYE and NIC liability for the period, with some exceptions. This came into effect for accounting periods beginning on or after 1st April 2021.

To ensure the R&D tax reliefs continue to support cutting edge Research and Development methods, the Government will expand qualifying expenditure to include data and cloud computing costs, reinforcing the UK’s status as a science superpower.

In his Autumn Budget, Rishi Sunak referred to refocusing R&D activity towards innovation in the UK. While UK companies claimed tax relief on £47.5 billion of R&D expenditure in 2019, the ONS estimates that only £25.9 billion of this was spent in the UK. It attributes much of this gap to activity taking place overseas.

Without more detail, we can only speculate that this means expenditure on subcontract labour and external workers situated outside the UK will cease to be eligible for relief, or perhaps at a very much lower rate than the current 65p for every £1 spent (subject to the rules on connected parties). It could also mean that any testing or other physical R&D activity taking place outside the UK will be ineligible, but this seems less likely.

Diane Deller, Senior Tax Manager at TaxAssist Accountants, said: “From a fiscal perspective, it is obvious why this seems like an improvement from the Government’s perspective. But in practice, this is likely to be bad news for many SMEs. For projects that relate to IT, we see huge amounts being spent in India, for instance, which has a very large and highly skilled workforce. It is wishful thinking on the Government's part to imagine this could be replaced overnight by workers in the UK.”

The detailed proposals are due to be announced later this autumn and are anticipated to come into effect from April 2023. We will keep a close eye on the proposals and will issue an update as more information is released.

Date published 27 Oct 2021 | Last updated 20 Mar 2024