Specialist Tax Adviser Aiglon Consulting
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Chancellor Rishi Sunak visits the National Institute for Health Research
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R&D tax relief to be restricted to UK activity

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Now the UK has left the EU, the Chancellor announced in today's Budget that he's limiting R&D tax relief to work undertaken in the UK. David O'Keefe analyses this change as well as the new cloud computing relief. 

27th Oct 2021
Specialist Tax Adviser Aiglon Consulting
Columnist
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Firstly, the list of eligible expenditures will be amended to include data and cloud computing costs. Second, the rules will be amended to ensure that relief is only given for R&D activity undertaken in the UK.

Data and cloud computing costs

The prospect of including these items in the list of eligible expenditure categories was first raised in a consultation document published in July 2020.

Whilst it is clearly good news that the government will be including these items as eligible expenditure, it is not clear at this stage how exactly these items will be defined for these purposes.

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Data costs could include the acquisition of data sets for use in R&D activity, for example, but will it include the costs of the company generating its own data sets? Cloud computing is a broad concept so, again, how will this be defined for these purposes. Will it encompass the costs of cloud server hire, or will it be limited to the costs of software hosted in the cloud?

Hopefully these questions will be answered fairly soon, although the intention is that the changes will not take place until April 2023. Ultimately, of course, this announcement is very welcome and will benefit a lot of innovative UK businesses.

Limiting relief to UK based R&D

When the reliefs were introduced, the UK was a member of the EU. In order to comply with EU non-discrimination requirements and not over complicate the reliefs there were no territorial limitations placed on where the work could be undertaken.

Now that the UK has left the EU the government has clearly decided that the time is right to limit relief to work undertaken in the UK.

Again, the details of the proposal are not yet known but it is probably safe to assume that activity will need to be undertaken within the UK, possibly even by businesses or self-employed individuals that are within the charge to UK tax.

The logic for this proposed change is pretty clear, the UK is paying out relief for work that is actually being undertaken overseas. Although the benefit of the R&D will arise in a UK business, the relief is still subsidising skills development outside the UK.

By restricting the relief to UK activity, the government will be hoping that some of those skills will be imported into the UK. Obviously there will also be a benefit of a reduction in the cost of the R&D relief.

My worry is that some businesses will find the cost of their R&D activity rising as they struggle to find the required expertise for specialist elements of their R&D within the UK.

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By ireallyshouldknowthisbut
27th Oct 2021 16:28

What I found odd in the speech was the statement that there was X£BN in R&D credits, but only Y£BN in UK R&D projects. I did wonder if the gap was not overseas projects - but fraud.

Anyone who deals with this area knows there are huge overclaims on a routine basis for R&D tax credits exploiting the techchial ignorance and lack of resources of HMRC.

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