Specialist Tax Adviser Aiglon Consulting
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Budget 2020: R&D tax relief

David O’Keeffe outlines the three Budget proposals that impact R&D tax relief, together with one further unannounced change.

11th Mar 2020
Specialist Tax Adviser Aiglon Consulting
In association with
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R&D and IP

The Chancellor has set an ambitious target for research and development (R&D) spending in the UK. He clearly hopes that the additional benefit from the changes announced will encourage business to invest more in their R&D spending.

The three tax changes relating to R&D tax relief are:  

  • The rate of R&D Relief Expenditure Credit (RDEC) is to be raised from 12% to 13%.
  • The proposed reinstatement of a PAYE/NIC cap for the SME relief will be delayed by a year. During that time, there will be further consultation on the design of the cap.
  • A consultation on whether expenditure on data and cloud computing should be eligible for inclusion in an R&D relief claim.

The rate of expenditure credit

R&D Expenditure Credit (RDEC) was introduced with effect from April 2013 as a replacement for the original large company super-deduction relief. 

The rate of expenditure credit was initially set at 10%, but increased to 11% from 1 April 2015, and again to 12% for expenditure incurred on or after 1 January 2018. The latest proposal will see the rate increased to 13% for expenditure incurred on or after 1 April 2020.

The RDEC is an ‘above the line’ taxable credit, so the benefit of the rate is currently 9.72% of qualifying expenditure. With the combination of the corporation tax rate being held at 19% and the RDEC rate rising to 13%, the benefit of this relief will rise to 10.53%.

It is worth stressing that the RDEC relief is not just for large companies. SMEs can claim RDEC on these categories of expenditure: 

  • subsidised expenditure, 
  • expenditure on R&D subcontracted to them by a large company,
  • capped R&D expenditure, 

The RDEC relief is significantly less attractive than the SME relief, so this increase will be very welcome.

PAYE/NIC cap for SME relief

This proposal feels like a long running saga. The original PAYE cap was removed in FA 2012 for accounting periods ended on or after 1 April 2012.

In his 2018 Budget, the then Chancellor (Philip Hammond) announced an intention to reintroduce a PAYE/NIC cap for SME R&D claims to help combat fraudulent claims. 

A consultation ran in early 2019 which identified a number of problems with the design of the proposed cap. HM Treasury agreed to reconsider the proposals, taking account of the comments made during the consultation.

The intention had been to introduce legislation in time for the revised cap to take effect from 1 April 2020. Unfortunately, political events meant that those revised proposals have not been published.

The new Chancellor has decided that the cap cannot come into effect this year, there clearly isn’t time to get the legislation introduced. Instead, there will be a further consultation on the specifics of the design of the cap, with a view to the cap being effective from 1 April 2021.

I am not surprised that the effective date of this proposal has been put back 12 months, but I am disappointed that it was allowed to get to this point in the first place. It does seem a shame to have to announce the delay of a proposal designed ostensibly as an anti-avoidance measure in the same Budget as an announcement of a ‘package of measures today to clamp down on aggressive tax avoidance […] including extra funding for HMRC to secure £4.4bn of additional revenue.’

Consultation on extending eligible expenditure

Many businesses undertaking R&D activity have to acquire specific data sets in order to properly perform that R&D activity. HMRC has generally refused to accept that the cost of acquiring that data can be an eligible expenditure. The only existing category into which it might fit is ‘software or consumable items’, but HMRC’s view is that data is neither ‘software’ nor ‘consumable’.

Similarly, many businesses are finding that they are utilising significant cloud computing resource in order to perform their R&D activity. There is no current category of eligible expenditure into which this fits.

A consultation will be launched to consider whether these categories of expenditure should be included within the R&D legislation. This is a welcome move as it reflects the changing nature of much of the R&D that takes place today.

Externally Provided Workers 

Although this was not mentioned in the Budget, I have been advised by HMRC that the changes will be made to the rules for the cost of externally provided workers (EPW). 

From 6 April 2020, amendments are to be made to the legislation relating to workers services provided through intermediaries. These changes could have prevented some of the expenditure which R&D claimants currently include in their claims for EPWs from qualifying. 

The legislation bringing in these changes will include consequential amendments to the externally provided workers provisions in CTA 2009, Part 13  to ensure that claimant companies can continue to claim the same amount of relief for EPW expenditure on research and development.



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