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Spring Statement: R&D tax relief

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David O’Keeffe has found a few welcome tweaks in the research and development tax relief announcements, with more changes promised from April 2023.

23rd Mar 2022
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There was speculation that the Chancellor was going to announce big changes to the R&D relief today, with the possibility that the generosity of the SME relief could be cut back in favour of R&D Expenditure Credit (RDEC) relief for larger companies. There were no bombshell announcements but the Chancellor did promise that the government will reform the generosity of tax credits on the money private firms spend on research and development.

It appears that the government is going to look at increasing the generosity of the RDEC relief, which will be welcome news for large companies (and those SMEs where they have to include some or all of their expenditure in an RDEC claim). 

Where does this leave SMEs?

What we will need to watch for is whether this will be balanced by a reduction in the benefit for the SME relief. The government is clearly concerned that the RDEC seems to be more successful at generating additional R&D activity than the SME relief. Indeed, the surveys that have been undertaken do seem to support that view, but my big worry is that these surveys misinterpret the fact that larger companies are more likely to be able to more accurately track additional R&D arising from the relief. 

The review of the R&D reliefs continues and further announcements are expected in the autumn. In the meantime, I am sure we will see more effort to tackle abuse of the R&D tax relief, particularly the SME relief.

Data relief expanded 

We already knew that there were plans to allow data costs where the data is used in the R&D process, but the government is to go further and allow all cloud computing costs associated with R&D. This means that storage costs for data, for example, will also now be allowed.

It seems that there is also to be a small change to the definition of R&D to allow advances in pure mathematics to qualify. At present mathematical advances in themselves are excluded from the definition of R&D in the Guidelines on the Meaning of R&D for Tax Purposes. This is very welcome news for businesses working at the cutting edge of AI developments, for example.

U-turn on overseas costs

It had previously been announced that the government wanted to restrict the availability of R&D relief where that R&D was carried out overseas. The Chancellor has announced that, following responses to the original plans, overseas R&D will still qualify in certain circumstances where it is necessary for the R&D to take place overseas.

The legislation will ensure that expenditure on overseas R&D activities can still qualify where there are:

  • material factors such as geography, environment, population or other conditions that are not present in the UK and are required for the research – for example, deep ocean research; or
  • regulatory or other legal requirements that activities must take place outside of the UK – for example, clinical trials.

These changes are expected to come into effect from April 2023, with draft legislation to be published this summer.

Spring Statement coverage brought to you in association with Accounting Excellence.

2022 Spring Statement in association with Accounting Excellence Awards

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