Reforming UK R&D Tax Reliefs in Autumn Budget

Some of the headlines are:

The government is reforming R&D tax reliefs to support modern research methods by expanding qualifying expenditure to include data and cloud costs, to more effectively capture the benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK, and to target abuse and improve compliance.

The UK tax system provides very generous support to encourage companies to conduct R&D activity, worth 0.25% of GDP in 2018 compared to an OECD average of 0.1% of GDP. However, UK businesses invest less than half the OECD average in R&D.

Following the consultation launched at Spring Budget 2021, the government is announcing reforms to R&D tax credits.

While UK companies claimed tax relief on £47.5 billion of R&D expenditure in 2019, the ONS estimates that businesses only carried out £25.9 billion of privately-financed R&D in the UK. This gap is partly explained by companies being able to claim for activity taking place overseas. This suggests that the UK is not effectively capturing the benefits of R&D funded by the UK taxpayer through the reliefs. Many other countries, including Australia and the USA, do not offer relief for R&D activities performed overseas.

To more effectively capture the benefits of the reliefs, including improved skills, know-how and understanding, the government will refocus the reliefs towards innovation in the UK.

The government will also set out plans to tackle abuse of and improve compliance with the R&D tax reliefs later in the autumn.

In a way, the PAYE cap introduced on 1 April 2021 went towards addressing bullet points second & third from the bottom and it will be interesting to see how the government will implement these changes.

Here is the link to the consultation launched at the Spring Budget 2021 – Consultation Document - Spring 21

Here is the link to the full Autumn Budget Report 2021 - Autumn Budget - 2021