Budget Changes to R&D Incentives

Chancellor announces changes to modernise and re-focus R&D tax incentives for UK innovation.

Chancellor announces changes to modernise and re-focus R&D tax incentives for UK ...

Following a comprehensive consultation into research and development (R&D) tax incentives earlier this year, the Chancellor announced several changes that will be made with effect from 1 April 2023. Firstly, it was confirmed that the incentives will be modernised to include costs on data and cloud computing. Secondly, the Chancellor confirmed that the rules will be amended to re-focus the incentives for innovation in the UK, potentially excluding overseas R&D. Thirdly, there will be changes to the administration of the regime to make the anti-avoidance deterrent more robust. However, no details on the precise design of these measures have yet been released and these are not expected until later this autumn.

The first measure is welcome as it makes the incentives more relevant to modern methods of R&D. Data is increasingly pivotal to R&D and innovative businesses have been embracing cloud computing so this will successfully make the R&D incentives regime more relevant to current R&D practices.

The second measure, however, could have significant implications for many innovative UK based businesses. Whilst it is understood that the Government is seeking to target the incentives for UK based R&D, this appears to potentially conflict with the agenda to modernise the incentives regime. The Office for National Statistics estimates that of the £47.5 billion of R&D spent in 2019, only £25.9 billion was privately financed in the UK, so the impact could be very significant. It could impact many businesses that have international innovation supply chains, access the global talent pool within their corporate group or from third parties, have a physical presence for R&D overseas or have implemented hybrid working methods where employees may work remotely anywhere around the globe. Some of the big social challenges, including carbon zero and developing solutions to new health crises, will require an international co-operative effort to achieve a solution. The concern will be whether genuine R&D funded by UK businesses will be excluded from the R&D tax incentives as a result of this measure.

Given the large increase in the number of claims HMRC’s stance on introducing further anti-avoidance measures is understandable, however it is hoped this does not unduly add to the administrative burden of genuine claimants.

Businesses that incur costs on data and cloud computing should consider tracking these costs from 1 April 2023 to ensure their claims are optimised. Businesses with overseas R&D should consider modelling the impact of the changes on their claims once more details of the changes have been published. In addition, businesses should consider their relevant stakeholders who should be informed of the implications of these changes on the net cost of innovation for future R&D.