Autumn Budget 2021 and R&D tax credits
Chancellor Rishi Sunak announced the UK’s Autumn Budget and Spending Review 2021 on 27 October, which outlined the government’s future economic plans. With the effects of the pandemic continuing to underline much of the government’s spending, it's not surprising that most of the budget focused on the recovery of the UK economy.
Alongside general economic support measures, the budget also includes significant updates to the UK’s R&D tax credit scheme. These come in the form of greater investment in innovation, more eligible R&D costs, as well as efforts towards improving the delivery of R&D tax relief. Many of these changes were influenced by the consultation that took place during the Spring Budget 2021.
The changes to the R&D tax credit scheme are:
- The expansion of qualifying expenditure with regards to software. In an effort to support modern research methods, qualifying expenditure will now include cloud computing and data costs, the details of which have not yet been released. This development has been a long time in the making, with the many industries that use cloud-based software calling for an update to HMRC’s policy.
- Refocusing R&D tax credits to innovation in the UK. Under the current R&D tax credit scheme, companies can claim tax credits on R&D work that is subcontracted worldwide. However, the Chancellor announced that the government will be refocusing reliefs towards innovation in the UK, which could have implications on overseas R&D. While we don’t know what steps the government will take, the aim is to improve skills and knowledge, and encourage investment in the UK.
- An overall increase in R&D investment. The Chancellor also announced that the government will invest £20 billion in R&D by 2024/25. This idea is to increase R&D expenditure to 1.1% of GDP, which is well above the 2018 Organisation for Economic Co-operation and Development (OECD) average of 0.7%. He maintains this will culminate in the target of £22 billion annual R&D investment by 2026/27. This expenditure does not take into account the amount the government will allocate towards R&D tax relief.
- An extension of the temporary Annual Investment Allowance of £1m. To stimulate R&D work in the medium term, the Chancellor also announced that the temporary £1m Annual Investment Allowance (AIA) is to be extended to March 2023. The temporary AIA increases the limit from £200,000 to £1,000,000 for expenditure on plant and machinery costs. It was introduced at the start of 2021 and was due to end this December.
What do these changes mean for the future of UK R&D tax credits?
The budget also included many plans that the government said it would fulfil in relation to R&D tax relief in the years to come.
As mentioned previously, one of these is an increase in UK R&D investment across the board. According to Oxford Economics, on average every £1 the government spends in public R&D generates £2 of private R&D investment. Through this investment, the government is looking to drive economic growth by allowing forward-thinking businesses to prosper and lead the way. This investment will not only create more jobs in the future, but could also help companies with the high entry costs associated with R&D work, which have traditionally been a deterrent for conducting R&D. Coupled with the financial benefits of R&D tax credits, it's an exciting time to be involved in the running of innovative businesses that are undertaking groundbreaking R&D projects.
The budget also confirmed the 25% Corporation Tax rate for companies with profits over £250,000, which will also come into effect from 1 April 2023. Companies claiming under the SME scheme will receive a higher net benefit, while those claiming through the RDEC will experience a slight decrease in net benefit. The degree that the net percentage benefit will change will vary depending on profit levels from company to company. As a majority of UK businesses are SMEs, this is largely a positive change for R&D tax credits.
Another of these plans is to tackle abuse and improve compliance within the R&D tax credit scheme. This policy aims to ensure that the benefit of R&D tax relief goes to those that deserve it.
What does this mean for your clients’ R&D Tax Credits Claim?
The Finance Bill 2022-3 will be the next opportunity to legislate these plans, which will only take effect thereafter. This means, right now, it is unclear exactly how the government will implement these changes and how they will directly affect your clients’ R&D tax credit claim.
We do know, though, that these changes are due to come into effect in April 2023, and since HMRC allows work to be included in a claim up to two years after the business’ accounting period, the R&D work your client is doing right now will be eligible for when the changes come into effect. So it’s worth preparing your client’s claim ahead of time. This is particularly relevant for R&D work done by your client outside of the UK, because, as mentioned above, HMRC is due to change their policy as part of efforts to refocus UK R&D.
It is also worth looking back on projects that have previously been ineligible to see if any costs would potentially become eligible under the new guidelines. In time, HMRC will outline exactly what new types of R&D work will be able to qualify for R&D tax credits so be sure to follow our blog for updates. A reminder that the project needs to have been undertaken within two years of the end of your client’s last accounting period. This specifically applies to companies working with cloud computing projects or projects centred around data. If any of your clients are conducting work in these areas, now is the time to start investigating if they are eligible to claim R&D tax relief.
While we might not know the details of how these changes will play out, it is clear that the R&D tax credit scheme will continue to support innovation, and these tabled changes will lead to more innovation, more skilled people, and a boost for the UK economy as a whole, which is altogether great news for your clients.
Let the experts at made.simplr help
With made.simplr, completing your client’s R&D tax credit claim is simple and stress-free with our easy-to-use tax credit claim software. Our software will incorporate all the changes to UK R&D tax relief when they occur, so any uncertainty you might have as to whether your client;s claim is affected or not is mitigated. made.simplr integrates with the Xero accounting platform, which aids in the accuracy of your submitted figures. We also help you ensure your client’s claim doesn’t miss out on any qualifying expenditures, thereby maximising their R&D tax benefit.
Get in touch and book a demo today.
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