In this article, Neil Taylor, Director at Edwards Chartered Accountants, reflects on the impact of the R&D tax credit changes for technology businesses as announced in the Chancellor’s Autumn budget last week.
The recent budget contained a mixed bag of measures in relation to Research & Development (R&D) tax credits which brings good news on one hand but could in fact reduce the amount that some high-tech businesses can claim rather than increase it when the details are fully known.
It was announced that eligible R&D costs for tax relief will be extended to include cloud computing and data costs to 'support modern research methods'. At the same time, changes will also be introduced to ensure R&D tax relief rules are targeted and 'refocused' towards R&D investment and innovation that takes place in the UK. The announced changes are due to be introduced in April 2023 but further details are yet to be published.
The good news: R&D tax relief extended to cloud computing and data costs
R&D tax credit advisors have argued for a long time that tax relief for cloud computing and data costs should be claimable. This will be good news for many claimants and will also give some much needed clarity to advisors. This doesn’t just affect software companies as many high-tech companies in the life sciences sector for instance generate large amounts of data and incur considerable costs of this type. The ability to claim for these costs as announced in the budget is most welcome.
The not so good news: limitations on claims for R&D carried out abroad
UK companies often carry out work overseas often with external contractors. These costs are normally claimable and form an important part of an R&D tax credit refund. The budget – 'Protecting the jobs and livelihoods of the British people' read:
'While UK companies claimed tax relief on £47.5 billion of R&D expenditure in 2019, the ONS estimates that businesses only carried out £25.9 billion of privately financed R&D in the UK. This gap is partly explained by companies being able to claim for activity taking place overseas. This suggests that the UK is not effectively capturing the benefits of R&D funded by the UK taxpayer through the reliefs. Many other countries, including Australia and the USA, do not offer relief for R&D activities performed overseas.
To more effectively capture the benefits of the reliefs, including improved skills, know-how and understanding, the government will refocus the reliefs towards innovation in the UK.'
R&D at its best is a collaborative effort. Many high-tech companies will subcontract this work to world leading experts abroad. Life science companies will often conduct vital clinical trials overseas and companies working on solutions to climate change will work in countries which are dry and hotter than the UK. In recent years, the software industry has added much to the UK economy. In many cases, some of this work is subcontracted to teams in other countries. Whilst we understand it would be hugely beneficial to have these highly skilled jobs in the UK, it is unlikely at least in the short term that the UK workforce could supply the immediate need.
The finer details are yet to be revealed
The details of the R&D tax relief changes aren’t known yet. Hopefully, any territorial restriction will be well thought through so that companies that have little choice but to subcontract R&D work abroad are not disadvantaged. It does seem likely, however, that there will be some negative financial impact to companies carrying on work overseas. As with all tax changes, some companies won’t be affected at all but there are others that could be severely impacted.
Going forward, companies and their advisors might have to carefully weigh up not only the quality and costs of the people they work with but also the effect that each has on their eventual R&D tax credit claim.
About the author
Neil Taylor is a Director at Edwards Chartered Accountants. He is an experienced business compliance and advisory director with over 30 years’ experience. He heads up Edwards Technology, the research and development team which looks after the needs of the firm’s technology clients and the team has helped deliver over £30m in research and development tax credit refunds over the past five years. His clients encompass a wide range of industry sectors, with a particular specialism in technology businesses, and he regularly advises businesses that trade internationally.