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Budget 2021: What R&D Tax Credits Changes Mean for UK Businesses

GrantTree’s head of R&D Tax Credits, Sam Aiken, explains what the changes to R&D Tax Credits proposed in the autumn budget mean for UK businesses. 

Yesterday afternoon, Chancellor of the Exchequer Rishi Sunak unveiled his much-anticipated Autumn Budget and Spending Review for 2021

While eye-catching items like the public sector pay increase and the cut to the universal credit taper will receive the lion’s share of media attention, many businesses will also have taken note of the Chancellor’s promise to overhaul the R&D Tax Credits scheme to stimulate further private sector innovation and reduce subsidies on overseas subcontractors.

We are gratified that the Chancellor used the announcement to reiterate his belief that research and development activities are vital to the country’s long-term prosperity and welcome his renewed commitment to expanding public investment in innovation. 

Still, as with any budget announcement, the devil is in the details. To understand its true impact, we must look past the lofty political rhetoric and delve directly into the numbers and individual policies that lay beneath. 

Without further ado, here is a closer look at what these changes mean for British businesses.

Restricting subsidies for overseas development work

Unlike similar programmes operating in Switzerland, Australia, and the United States, Britain’s R&D Tax Credits scheme allows companies to claim relief on development work they subcontract overseas

This facility costs the UK taxpayer hundreds of millions of pounds a year while, in the government’s eyes, doing little to stimulate private-sector innovation or the wider economy.  

Limiting subsidies on overseas development would be the latest in a series of steps the government has taken to modernise, streamline and secure one of the country’s most important sources of innovation funding. 

In 2018, then Chancellor Phillip Hammond announced the treasury would reintroduce a cap on the size a payable tax credit loss-making companies can claim through the SME scheme. 

The PAYE Cap, which came into force on 1 April 2021, is designed to prevent shell corporations with few employees from funnelling R&D Tax Credits overseas. 

The cap is set at three times a business’s combined PAYE and National Insurance Contribution liability. Plus a £20,000 grace amount. Any amount over this limit is forfeited. 

In March 2020, the government hired 1,300 additional HMRC staff to improve tax collection and the agency’s ability to regulate compliance. This has led to a marked increase in the number of compliance checks on R&D Tax Credits claims, which is where HMRC determine whether an R&D Tax Credits claim is accurate and eligible for relief. 

At this stage, it’s unclear what changes the government will make to the R&D Tax Credits scheme to mitigate international outsourcing. It may simply make all expenditure on overseas contractors ineligible for relief. Or it may take a nuanced approach, like limiting subsidies for companies over a certain size. 

While my colleagues and I have congratulated the government on its efforts to ensure the long-term security of the R&D Tax Credits scheme, I do worry that this cut will negatively impact smaller firms that use outsourcers to make their development work economically feasible. 

In particular, I would worry that the nuclear option of removing overseas subcontractor subsidies entirely, instead of, say, limiting them on a means-tested basis, could harm the government’s ambitions of increasing nationwide R&D investment and putting science and technology at the heart of the UK economy. 

Whatever it decides, the government will codify its proposed changes in next year’s finance bill. They will come into effect on 1 April 2023.

GrantTree will be covering these changes extensively. If you want to keep up to speed on how they will impact your company’s R&D Tax Credits claim, make sure you sign up to GrantTree’s newsletter.

Data purchases and cloud computing costs

Still, it’s not all doom and gloom for R&D Tax Credits claimants. 

As part of the 2021 Spending Review, the Treasury announced it would be expanding the R&D Tax Credits scheme to cover cloud computing and data costs, two essential components of contemporary research and development. 

My colleagues and I welcome this change wholeheartedly. Last year, we contributed extensively to HMRC’s far-reaching consultation on the future of R&D Tax Credits, as well as to a separate consultation on cloud and data expenditure specifically. In both cases, we argued vigorously that these costs, which are critical to many forms of modern R&D, should be made eligible for relief. 

It seems the government will fund this expansion by restricting subsidies for overseas subcontractors. It is unclear what the net effect of these two changes will be. However, given that data from the Office for National Statistics and HMRC place annual investment in overseas R&D at something like £20 billion, I believe we are likely to see the overall funding delivered by R&D Tax Credits to fall from 2024. 

As I mentioned, this would seem to jar with the government’s restated ambitions to increase public investment in innovation. 

Will your R&D Tax Credits claim be impacted?

If you want to know more about how these changes will impact your R&D Tax Credits claim, feel free to drop us a line. 

Navigating the R&D Tax Credits scheme can be complicated at times. But our tax experts are always happy to help companies understand the ramifications of this legislation on their business.