Update: R&D Tax Relief
Whilst many expected the Chancellor to make seminal announcements regarding the R&D tax relief at the Spring Statement, many of those expectations didn’t materialize. Primary concern was attributable to the prospect of the existing 230% R&D tax relief available to SMEs being phased out or scaled down after concerns over the scheme being abused and lacking effectiveness in engendering advancements in knowledge from SMEs. Larger firms were hoping for more favourable terms to the R&D Expenditure Credit (hereafter termed RDEC) which would’ve incentivized such institutions to increase their spending on R&D.
The latter does seem to have promise as the Chancellor committed to improving the terms and conditions around RDEC by subjecting it to a review to decide whether reforms are necessary. Yet, it must be borne in mind that larger firms are likely to more sophisticated cost accounting and expense tracing systems and technology which enable them to keep a better record of their expenses relative to SMEs. This includes the proportion being expended on R&D and could be a causal factor over why the amount of R&D activity at larger firms far exceeds that present in some SMEs since the latter may be concerned about filing a claim which is incorrect and subsequently face investigations.
Against common consensus, the government has decided to continue to allow overseas costs relating to R&D to be claimed but this is contingent on the fact that the R&D work requires certain factors such as ecological, demographic or geographic which aren’t available in the UK. Additional reasons for conducting R&D abroad include more lax legislation which facilitates carrying out the R&D elsewhere rather than the UK. Yet, one should expect to keep a close eye on this spectrum should any changes occur soon given the government’s desire to tighten the scope of such claims.
Finally, costs relating to the use of data for the R&D process are planned to be permitted but the government expanded this scope to include R&D costs relating to cloud computing such as storing data. The confluence of this with the broadening of the definition of R&D to include advanced mathematics gives technologically oriented a considerable tax advantage and incentive to engage in R&D.
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