R&D tax credits - budget 2021 update

Our R&D tax experts share their thoughts on the impact that announcements made in the budget will have on businesses looking to invest in innovation.

Budget announcements

It was announced that a consultation will be undertaken into the effectiveness of the Research and Development (R&D) tax regime in supporting innovative UK companies and promoting the growth of the UK as an R&D hub. A number of changes to the R&D tax regime have been announced, including the introduction of a cap on SME R&D tax credit payments and response to the consultation on widening expenditure qualifying for R&D.  Decisions around R&D capital allowances will also be impacted by the new ‘super deduction’ available from April 2021 to March 2023.   

The new super deduction will provide a first-year capital allowance on certain plant or machinery at a 130% or 50% rate. These may be of interest to businesses to complement or possibly replace any R&D capital allowance claims.

An SME R&D ‘cap’ will restrict the amount of SME R&D tax credit relief that can be paid to the claimant based on the PAYE/NIC liabilities of the company. This has been introduced as an anti-abuse measure for companies such as ‘skeleton’ UK businesses which set up operations in the UK to recharge overseas R&D costs to benefit from the generous UK relief.

While the response to the consultation document indicated Government support for widening R&D qualifying expenditure to include data and cloud computing costs, a final decision on this is deferred until the overall review of the R&D regime has concluded.

Our thoughts

On first glance, these two changes to the R&D regime seem to be positive steps in the right direction for the UK R&D regime, as the Government seeks to reward businesses which are looking to invest in innovation activities in the UK, whilst the new R&D SME cap mitigates the potential of abuse of the R&D regime.

However, we see the 2021 Budget as a ‘missed opportunity’ to support smaller businesses who may not necessarily benefit from either change.

Innovative start-ups and small owner-managed businesses (OMBs) are likely to have limited benefits from the capital allowance boost. They tend to be people-intensive rather than capital intensive businesses, so capital expenditure is of limited value and their principal costs are those relating to the employment of talented personnel. An additional enhancement to the SME Tax Credit would have been of more value to such businesses than the capital allowances boost.

As regards the PAYE cap on R&D Tax credit payments, there is likely to be an unwanted impact on some SME companies that have a small number of employees but also high qualifying R&D expenditure.  This problem could be exacerbated if data and cloud computing costs become qualifying expenditures for R&D tax relief. Such businesses will find that their R&D Tax Credit repayment claims will be capped, notwithstanding that they are not seeking to abuse the R&D Tax Credits regime.  

We are hopeful that the Consultation into the UK R&D Tax regime announced at the Budget will take these concerns onboard as part of any future proposals for improvements to the effectiveness of that regime.

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