Spring Budget 2022 –Capital Allowances and R&D Tax Relief
The Chancellor touched on creating a “A new culture of enterprise” and the fact that improving productivity is the only way to deliver sustainable economic growth and increase living standards.
We follow what steps the government are taking to meet these commitments to growth by looking at some of the important changes to the capital allowances and R&D tax relief schemes.
Capital Allowances
The government made a clear statement of intent to make Capital Allowances more generous in the future. With the Super Deduction coming to an end and the Annual Investment Allowances due to reduce in April 2023, it is reassuring to hear that changes to address these reductions in relief are on the way. Against a backdrop of rising corporation tax rates in April 2023, capital allowances will be a key relief for growing businesses going forward.
While today’s budget didn’t contain concrete details of the changes to come, the press release presents some examples of the various ideas being considered.
These ideas include:
- A permanent increase of the Annual Investment Allowance (AIA) to £500,000
- Increasing the rate of writing down allowances for expenditure not qualifying for other enhanced reliefs: 18% -> 20% for main pool expenditure and 6% -> 8% for special rate expenditure.
- Implementing an initial, larger writing down allowance in the first year at, say, 40% and 13% for main pool and special rate respectively, with the remainder to be written down at the normal rates.
- Introducing a first year allowance that would be in addition to writing down allowances (rather than instead of), which could result in total deductions of more than 100% of the original cost of the asset.
- Allow “qualifying investments” of plant & machinery to be fully expensed.
- Changes to the Structures & Buildings Allowances, or other new specific reliefs.
Any of these changes would represent a significant evolution of the capital allowances regime, and we look forward to hearing more at the autumn budget.
R&D Tax Relief
The government had already announced a review of the R&D reliefs last year with the objective of ensuring that the UK remains competitive. The R&D tax relief scheme is being reformed to support modern research methods by expanding qualifying expenditure to include data and cloud computing costs as well as refocusing R&D relief on activity carried out in the UK.
We were already aware that the following new categories of expenditure will be brought into scope from 2023:
- Expenditure on licence payments on purchasing datasets which are used directly for R&D. Staff costs incurred in processing datasets will also be eligible for the relief.
- Cloud computing costs that can be attributed to computation, data processing and software. HMRC will allow businesses to claim relief for the cost of cloud computing services used directly for R&D. For example, costs which can be attributed to computation, data processing, analytics and software.
Today, the government went further and expressed that from April 2023, business will be able to claim relief on the storage of their vital data and pure maths research. As well as being able to claim for costs related to the storage of vital data, supporting data-heavy research such as genomic sequencing, the statement announced an expansion of the qualifying expenditure to include all mathematics, as the government recognises the growing volume of R&D being undertaken which is underpinned by pure mathematics. This reform will support nascent sectors where the UK has a comparative advantage such as Artificial Intelligence, quantum computing and robotics while also supporting strong sectors such as manufacturing and design. Legislation will be published in draft in the Summer before being included in a future Finance Bill, for these measures to come into effect in April 2023.
HMRC have also evaluated, compared and contrasted the effectiveness of both the Research & Development Expenditure Credit (RDEC) and the SME scheme to stimulate productivity and are aiming to understand why the figures are so different and what further changes might be needed to ensure that the tax reliefs incentivise companies most effectively to invest in additional R&D.
To ensure the effective targeting of the UK’s R&D relief the government will consider increasing the generosity of RDEC to boost R&D investment in the UK. This would rebalance the schemes and make RDEC more internationally competitive.
In addition to making the RDEC scheme more attractive, the government will consider what more can be done to tackle the abuse of R&D tax reliefs, particularly in the SME scheme, ahead of Budget 2023.
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