What next for R&D claimants? A preview of the next budget...

There’s never a dull day in UK politics!

Next month’s budget promises to be a landmark occasion – the chains are off and the UK Government has the chance to lay the foundations for a new beginning for post-Brexit UK business.

However, following last week’s cabinet reshuffle (which included the shock resignation of Sajid Javid) the new Chancellor Rishi Sunak and his team have less than three weeks to deliver, meaning even further uncertainty as to what we can expect to happen.

From a research and development point of view, the current Conservative Government has already stated an intention to increase its investment in UK R&D and had outlined two key proposals in its pre-election manifesto:

  • To increase the large company credit rate from 12% to 13%; and
  • To review certain cloud computing and data related costs which currently do not attract relief.

The proposed increase in the large scheme expenditure credit rate would see the effective rate of tax relief on qualifying expenditure increase from 9.72% to 10.53%. This rate applies to large companies (broadly those with over 500 employees) or SMEs who have either received funding for their development work or undertaken it on a subcontracted basis. It will be interesting to see whether there is a corresponding increase announced for the SME scheme, given the massive contribution to UK R&D made by smaller enterprises.

The latter proposal has become a more prevalent issue in recent years with an ever-increasing number of software related claims being made by firms in the software and IT industries. Cloud computing and data related expenditure have become an almost unavoidable cost for these companies, and in some cases are prohibitively expensive. The objective of the R&D scheme is clearly to incentivise UK development, so it is unsurprising that the Government is looking to review the eligibility of these costs for attracting additional tax relief.

A further measure which has previously been proposed is a potential reintroduction of a cap on the payable R&D tax credit for SMEs. The proposed cap would limit any payable tax credit to three times the value of a company’s PAYE and NI contributions in the financial year. This would adversely affect loss-making SMEs that predominantly use subcontracted labour to undertake their R&D activities, and also companies who write off large values of materials within their R&D process.

All of the above are subject to being ratified and approved by the Government on 11th March – you’ll hear about it here first!