As part of yesterday’s Budget, Chancellor Rishi Sunak has increased the rate of R&D Expenditure Credit (RDEC) from 12% to 13% from 1 April 2020, supporting businesses investing in research and development (R&D) and helping to drive innovation in the economy.
The Chancellor announced the following changes affecting those companies that claim or will claim the R&D tax relief:
Increase to the rate of the R&D Expenditure Credit (RDEC)
The Government announced an increase to the rate of the RDEC from the current 12% to 13% for expenditure incurred on or after 1 April 2020. The RDEC is claimed by those companies that are either too large to be able to claim the more generous SME R&D tax relief or for those SME sized companies that are unable to claim the SME relief due to receiving grants or subsidies for their R&D projects or because they are carrying out R&D that has been subcontracted to them in certain circumstances.
The change will be introduced in the forthcoming Finance bill and is forecast to provide approximately an additional £100m in relief over the next 5 years.
Introduction of a PAYE cap on the payable tax credit in the SME R&D scheme will be delayed until 1 April 2021
The 2018 budget launched a consultation by HMRC to prevent what is sees as abuse of the R&D tax relief for SMEs. It was expected that these changes to restrict the payable credit to an amount equal to three times the company’s PAYE & NIC would be in place for accounting periods ending on or after 1 April 2020.
It was announced in the budget that The introduction of a PAYE cap on the payable tax credit in the SME R&D scheme will be delayed until 1 April 2021.
The government will also consult on changes to the cap’s design to ensure it targets abusive behaviour as intended while ensuring that eligible businesses are able to access the relief. Responses to the original consultation will also be published.
Consultation on an expansion to qualifying costs
The Government announced that they will be consulting on whether expenditure on data and cloud computing should qualify for the R&D tax relief. These costs have not previously qualified as HMRC consider that they do not meet the definition of a consumable item under the current legislation. These types of costs can be considerable for certain types of software development activities.
Amendment to Externally Provided Workers rules
Changes will be made to the Externally Provided workers legislation to ensure that the upcoming changes to the status of contractors will not adversely impact on the qualifying costs for the R&D relief. These changes are designed to ensure that claimant companies can continue to claim the same amount of relief for the expenditure of workers supplied to the company involved in the company’s R&D projects.
The announcement of the proposed the increase in the RDEC relief to 13 per cent means that large companies can claim more support for their R&D, increasing the incentive to undertake it.
This will not only benefit larger companies but also those SME companies that for various reasons are unable to claim under the more generous SME regime.
The announcement of another consultation on the operation of a cap on the amount that SMEs can claim as a payable credit is welcome as there were concerns raised that the operation of the PAYE & NIC cap could mean that companies with a legitimately low employee base could lose out on the valuable R&D funding provided by the SME relief. The opportunity for the sector to continue to contribute to the design of the changes via a new consultation shows that Government is listening to the views of the companies that need full access to the payable credit element of the relief.
We have always believed that the costs of data and cloud computing should be included as qualifying expenditure and welcome the intention to consult on the potential inclusion of these types of costs in R&D claims. This will potentially benefit the software development sector where these costs can be significant depending on the type of development being undertaken.
We are reassured that these announcements clearly demonstrate the Government’s commitment to ensuring that the R&D reliefs are fit for purpose and continue to assist innovative companies in the UK.