Budget 2020: Our Predictions for Innovation Funding

The UK’s 2020 Budget will be announced on Wednesday. But what will it mean for innovation funding for UK businesses? GrantTree’s tax experts make their predictions.

On March 11 newly-appointed Chancellor Rishi Sunak will unveil one of the most important budgets of the last century. With it, he will look to tackle a range of national issues, including the Coronavirus, Climate Change and uncertainty in Brexit Britain.  

Innovation must remain high on the country’s priorities list. More than ever, we will rely on the UK’s doers and disruptors to stabilise the economy, keep employment high, and maintain Britain’s role on the world stage. 

But in this bluster of geopolitical headwinds, will Johnson’s government fan the flames of invention? We will know for sure by how it approaches one of the country’s most important schemes: the R&D Tax Credit. 

For almost 20 years, R&D Tax Credits have helped businesses take brilliant ideas from the drawing board to the high street; from mad idea to the mainstream. 

Will Johnson, Sunak et al support this cause? GrantTree’s experts have put their mighty brains together and have come up with some major predictions ahead of Wednesday’s announcement. Here’s what they expect to see:

An Increase in RDEC 

In their manifesto – ‘Unleash Britain’s Potential’ – the Conservatives promised to “increase the tax credit rate to 13 per cent”. 

This increase refers to the Research and Development Expenditure Credit (RDEC)

R&D Tax Relief is split into two schemes: RDEC, for larger businesses, and the more generous SME R&D Tax Relief scheme, for small and medium-sized businesses. 

At the moment, companies applying to the RDEC scheme can reclaim up to 12% of their eligible R&D investment back in tax relief. 

That’s for R&D performed after January 1st, 2018 and before tax. 

The Conservatives have promised to bump this up a percentage point. 

GrantTree's analysis

“While the SME scheme arguably does more to encourage innovation and support growing companies, an increase in RDEC would certainly be welcome,” said Sam Aiken, Head of Delivery at GrantTree.

“Because of the complicated laws surrounding linked and partner enterprises, and the overall complexity of the Tax Credits scheme, many smaller businesses end up claiming for RDEC. 

“An increase from 12% to 13% would help these companies compete more effectively with their competitors and encourage them to invest more in new technologies and solutions.” 

A Newer, Wider Definition of R&D 

The Tories have also promised to review HMRC’s definition of ‘research and development’, expanding it to include using and developing a range of new technologies. 

The definition of R&D is the scheme’s gatekeeper. It decides which companies are eligible and what costs they can claim for. 

The government has promised a new and expanded definition of R&D, covering investments in cloud computing and data. This will benefit hundreds of software companies, dramatically increasing the amount of financial support they’ll receive.

Changing this definition would also effectively reverse previous clampdowns on software-based claims.

GrantTree’s Analysis

The government’s definition of R&D is outdated,” said Dr Andy Elms, Senior R&D Tax Credits Consultant at GrantTree. 

“It doesn’t take into account a lot of genuinely innovative work software and other companies are doing to improve their products and services. Widening the definition to reflect the modern use of data science and cloud technologies will help many companies claim much-needed financial support that their work deserves.”  

Stay Up to Date

There have been encouraging signs that this new government that it will support UK innovation. 

Things could change of course (political u-turns and last-minute compromises are part and parcel of life in Westminster).  

Whatever the truth, we will find out in the Budget announcement on Wednesday.

GrantTree will be publishing a thorough analysis by the end of the week – make sure you don’t miss it by subscribing to our monthly newsletter.

If you want to know if your company is eligible for R&D Tax Credits, get in touch! One of our experts will be happy to help.

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