Investing in research and development (R&D) formed a major part of Chancellor Rishi Sunak's Autumn Budget, although it contained little detail.
"We have four of the world's top 20 universities, 14% of the world's most impactful research, and the second most Nobel Laureates," he said.
A pledge to spend £20 billion a year on R&D was followed by a 26-page report tweaking the R&D tax reliefs currently on offer in the UK.
This centred on the R&D expenditure credit (RDEC) and the small and medium enterprises (SME) R&D relief.
These reliefs support companies in the science and technology sectors by offering a corporation tax deduction for making "advances in their field".
The report sheds more light on the Chancellor's attempt to get these UK businesses to invest significantly more in R&D before the end of parliament.
Subject to draft legislation, due to be published next summer, the following revised rules should be introduced from 1 April 2023.
Data & cloud computing costs
A positive result for UK companies will see qualifying expenditure for R&D tax credits expand to include data and cloud computing costs.
Specifically, the definition of R&D will expand to include expenditure on:
- licence payments for datasets
- cloud computing costs that can be attributed to computation, data processing and software.
- Data acquisition costs can be extremely expensive for companies and can be vital for a favourable R&D result.
UK-focused reliefs
Under the current rules for both tax reliefs, companies are able to claim relief on R&D activity conducted overseas.
This is useful, for example, to gain licensing approvals for new drugs or vaccines which involve clinical trials taking place outside of the UK.
From April 2023, companies will only be able to claim relief for expenditure where a third party performs work within the UK.
Companies will also only be able to claim relief for externally-provided workers who are paid through a UK payroll.
Crucially, as far as the UK's life sciences sector is concerned, payments made to overseas clinical trial volunteers will be allowed.
Improving compliance
New measures to combat abuse of R&D tax reliefs and fraud were also confirmed in the report.
All claims must:
- be made digitally with endorsement by a named senior office of the company
- include advance notice to HMRC before making a claim
- include greater detail about the claim, with details of any agents who advised the company on making the claim.
- The Treasury hopes these changes will tackle "boundary-pushing and abuse" in the system, without affecting compliant companies.
Streamlining the process
On one hand, the Treasury needs to ensure these measures are effective. On the other, it must not make the process overly complex.
Simplifying the R&D tax relief application process includes, but is not limited to:
- doubling the time limit for making an R&D claim to two years from the end of the accounting period to which they relate
- supporting businesses to transition from the SME scheme to RDEC, by providing that when a SME within a group becomes large, all companies in the group will retain SME status for one year.
Talk to us about claiming R&D tax relief.