Good news for innovative businesses with £22 billion of R&D funding and an increase in the R&D Expenditure Credit from 12 percent to 13 percent effective from 1 April 2020.
£22 billion of R&D funding by 2024-5 will be made available for industries from nuclear fusion to electric vehicles and specific research organisations, as well as the creation of a new research agency. This significant investment in R&D is great for the UK’s innovative businesses, but the funding is likely to be grant based and so will go to specific industries and areas of research.
The increase in the R&D Expenditure Credit (RDEC) is welcome because it will be available to all businesses undertaking R&D. The increase from 12 percent to 13 percent will apply to expenditure incurred from 1 April 2020. This will mean a cash credit of £10.53 for every £100 of qualifying R&D expenditure.
In addition, the Government is looking to expand and modernise the scope of the regime to include the costs of data and cloud computing. This is a welcome and much needed measure given the current definition only extends to ‘software licences’ and the significant advances made in the use of technology to undertake R&D since the regime was introduced. This change is likely to have a wide impact so the Government will need to think carefully about how to define the costs they want to include and the potential for these costs to increase significantly in the future. The Government is expected to publish a consultation shortly.
In a move that will help some small and medium sized businesses (SMEs), HMRC have announced a one year delay to the previously announced PAYE cap. The anti-avoidance measure was set to apply to SMEs claiming R&D tax credit refunds. This would have restricted the amount of any refund to three times the amount of PAYE that a company pays. The Government will consult on safeguards to ensure that genuinely eligible businesses can access R&D tax incentives. The changes are now expected in April 2021, but demonstrate that HMRC are taking into account the concerns voiced by business during the consultation last year.
HMRC have also advised that R&D claimants that are impacted by the changes to the ‘off payroll workers’ or ‘IR35’ rules may have found that costs previously included in the R&D claim as ‘externally provided workers’ are no longer eligible. Legislative changes are being introduced to ensure that expenditure previously categorised as qualifying externally provided workers can still be included in the claim. This area is complex but companies with workers off the payroll should consult on the employment taxes implications and be aware there may be implications for their R&D claims.
Who will it impact?
The measure to provide £22 billion of R&D funding will affect those businesses that meet the requirements for the funding. In particular the nuclear fusion, space, electric vehicle, life and animal science industries are likely to benefit. Moreover, the measure to increase the RDEC rate will impact large corporates and corporates that are SMEs but claim the RDEC due to the R&D being subsidised or subcontracted by large entities.
The consultation on widening the regime to include investments in data and cloud computing will impact all corporates that have incurred such expenditure in undertaking R&D.
The PAYE restriction issue will only apply to SMEs with a low PAYE cost base, but can have adverse implications for new start-ups that may avoid taking on employees in the early phases of the business life cycle.
For companies undertaking R&D these will be welcome measures that will increase the amount of funding available to be reinvested in R&D and mean that the true cost of R&D can be reduced.
The increase to the RDEC is fantastic news for current and future claimants of the RDEC, as this is an important incentive for companies to invest in innovation. Together with the Chancellor’s announcement that the Government will increase public spending on innovation to £22 billion, this shows a commitment to putting innovation at the heart of the UK economy.
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