Wide-reaching consultation launched on the future of R&D tax incentives
Wide-reaching consultation launched on the future
HMRC have announced a wide-reaching consultation on the future of R&D tax incentives as part of the Budget.
HMRC have launched a consultation that represents a fundamental review of the Research and Development (R&D) tax incentives regime in the UK. It covers every important aspect of the regime and the outcome will impact all businesses currently making R&D claims regardless of their size or sector. The Government’s aim is to raise total investment in R&D spending in the UK to 2.4 percent of UK GDP by 2027 and the R&D tax incentives regime remains one lever at its disposal to attract R&D investment in the UK. The consultation is seeking views on what changes can be made to UK R&D tax reliefs to ensure that the UK remains a competitive location for undertaking R&D activities, that the R&D incentives are providing taxpayers with value for money and that the regime remains up-to-date, competitive and well targeted.
At a glance, the key areas covered in the consultation include:
- Considering moving from two R&D regimes (currently there is the R&D Expenditure Credit (RDEC) regime broadly for large entities and the Small or Medium sized Enterprise (SME) regime) to one single R&D incentives regime for the purposes of simplification and coherency– referred to as “RDEC for all” in the consultation document;
- Removing R&D incentives from the corporation tax self-assessment regime and having an alternative means of administration that could require more information being provided at the start of the claim process for advance assurance or approval;
- Considering how the roles of HMRC, agents and businesses can be improved in the R&D claim process;
- Whether the current definition of R&D (that has broadly applied since the introduction of the scheme in 2000) is still fit for purpose or whether it should be amended to better reflect modern R&D practices;
- Whether the R&D regime should be targeted at specific sectors or regions i.e. different rates for different sectors/regions and for investment in more socially beneficial R&D e.g. ’green technology’;
- Whether any changes should be made to the type of expenditure eligible for R&D incentives; and
- The inclusion of costs for R&D performed outside of the UK e.g. overseas externally provided workers or subcontracted R&D, with a focus on ways that the benefits can be measured as to whether the R&D carried out overseas provides benefits to the UK economy.
The consultation will close on 2 June 2021 and this is an opportunity for businesses to have their thoughts heard by HMRC and the Government in relation to how the R&D tax regimes in the UK operate. All businesses intending to claim R&D incentives in the future will be impacted by the results of this consultation and it is difficult to understate the importance for businesses to ensure they feedback and help shape a R&D regime that is fit for the future and ensures innovation is optimised in the UK.
In other R&D related news, the responses to the previous HMRC consultation on whether to change the scope of qualifying expenditure to include data and cloud computing costs have been published. There seems to be a broad consensus to bringing data costs into the scope of qualifying expenditure for the R&D tax regimes and HMRC accept there is a clear move away from traditional software to cloud computing such that this part of the regime may need updating. There was no real consensus on qualifying indirect activities i.e. support activities for R&D. The key outcome was that the Government sees a strong case for bringing in data and cloud computing costs but it does not want to add additional complexity. In conclusion, HMRC have confirmed there is a strong argument for inclusion of data and cloud computing costs in the R&D regime to reflect modern R&D practices but this will now be considered as part of the wider consultation.
In addition, two changes have been announced to the draft legislation in relation to the PAYE/NIC cap for SMEs that was published in November 2020. The context to this is that this measure is intended as an anti-abuse measure by ensuring companies claiming refunds have some substance in the UK. Firstly, the new rules will now be applicable for accounting periods starting on or after 1 April 2021, as opposed to applying for expenditure with effect from 1 April 2021 as previously suggested. Secondly, the definition of intellectual property (IP) is being widened to include know how and trade secrets. Previously it had been more narrowly defined to registered IP. This recognises many businesses may opt not to formally register or protect IP but rely on trade secrets. These are both welcome changes reflecting concerns voiced by businesses ensuring genuine businesses are not adversely impacted.
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