The 2020 Budget included some interesting announcements concerning Research and Innovation. The Government has committed to invest in this area over the coming years with a target of increasing economy-wide investments in R&D to 2.4% of GDP by 2027. With regard to R&D tax incentives, the key points were as follows:
Increase in the rate of Research & Development Expenditure Credit (RDEC) from 12% to 13% from 1 April 2020.
As the RDEC credit is itself chargeable to corporation tax, every £100 spent on eligible R&D costs will effectively attract a cash ‘subsidy’ from HMRC of £10.53 after deducting 19% tax. This is an increase of £0.81 on the cash ‘subsidy’ of £9.72 that would currently be available. It is a little disappointing that the additional tax incentive is so small in the context of the Government’s wider support for innovation.
There is no increase in the rate of R&D tax credits available for SMEs, which again is a little disappointing.
Consultation on potential widening of costs eligible for R&D tax credits
The Government will consult on whether expenditure on data and cloud computing should qualify for R&D tax credits, which is welcomed.
Many IT and software companies have been surprised to find that their expenditure on data for the purposes of their qualifying R&D projects does not qualify for R&D tax credits, effectively on a technicality. Simplification of the rules in this regard would be very helpful.
Delay on proposed introduction of PAYE ‘cap’ on payable R&D tax credits
Following consultation last year, the introduction of the PAYE cap on the payable tax credit in the SME R&D schemes will be delayed until 1 April 2021.
The cap was proposed as a measure to counter abuse of the R&D tax credits scheme for SMEs, in particular the mechanism which allows a credit to be paid in cash even where the company has no tax liability. However, the proposals would potentially have led to an adverse position for many innocent parties, including start-up companies and those outsourcing R&D activities due to insufficient resources or expertise of their own, and it was clear that this required some further thought and amendments to the design of the rules.
Thankfully, the government undertook a consultation exercise before amending the legislation, and it has listened to the views of industry that were fed back. It will consult further on changes to the cap’s design, to ensure that it targets abusive behaviour as intended while ensuring that eligible businesses are able to access the relief.
Workers provided through intermediaries
Tax changes are due to come into effect from 6 April 2020 relating to workers providing their services through intermediaries. Some amendments will be made to the R&D tax credits legislation to ensure that these changes do not affect a claimant company’s R&D tax credits claim.
Patent Box – no changes
With the focus on Research and Innovation, it is a little surprising that no changes are being made to the Patent Box tax incentive. With the UK’s withdrawal from the EU, some simplification measures could be made to the Patent Box incentive to increase its attractiveness as well as making it easier to calculate. Perhaps this is a point that will be addressed in the next Budget in the post-transition period.