Future of R&D – The Debate Continues

Important Spring Statement R&D Announcements

The government once again reaffirmed its ambition to broadly refocus the UK’s R&D tax regimes towards domestic R&D activities, particularly via the exclusion of certain overseas costs from qualifying expenditure. In this respect, however, the Chancellor’s recent Spring Statement differed from previous announcements, including those made in Autumn 2021.

Whilst the UK-centric approach to qualifying expenditure will remain a key tenet of the government’s proposals, it is clear that the Chancellor has taken heed of comments made during a recent Consultation. Of note, for example, was the Chancellor’s commitment to allow special exemptions where R&D activities must be carried out overseas due to “regulatory” or “material” factors. We expect that these exemptions could be of particular benefit to the life sciences and energy sectors. For example, costs incurred through undertaking overseas clinical trials could still be an allowable cost providing there is no viable alternative within the UK.

The Spring Statement also reaffirmed the government’s commitment to keep the UK R&D regimes balanced and internationally competitive. Significant in this respect was the Chancellor’s announcement of a possible rise in the rate of Research & Development Expenditure Credit (RDEC) in the future. This could potentially offset some of the net costs to claimants of no longer being able to include all overseas expenditure within their claims. It might also help compensate for some of the lost cash benefit after tax received by claimant of the RDEC resultant from the planned rise in the rate of Corporation Tax in 2023. (The RDEC credit is a taxable and above-the-line credit). We would hope to hear more on this matter when the Chancellor delivers his Autumn Budget 2022.

The Chancellor also announced that the scope of qualifying R&D will be expanded to include new data, storage, and cloud computing costs. This is a slight adjustment to similar announcements made within the Autumn Budget 2021 in that the government initially planned to include only a limited amount of data costs, rather than the broad scope implied in the Statement. Companies that incur expenditure on acquiring, processing, and storing data as part of their R&D activities will also benefit. This includes those engaged in data-heavy activities such as genomic sequencing as the cost of storing vital data will now be eligible for relief.

Furthermore, it was newly announced at the Spring Statement that the scope of relief would be expanded to include pure mathematics. This is chiefly to support R&D efforts within the Artificial Intelligence, Quantum Computing, and robotics sectors. Although it is also true that other sectors might benefit through claiming ancillary costs relating to pure mathematics in their R&D projects.

Overall Thoughts

These reforms should be seen as an important indication of the government’s overarching effort to keep the UK at the forefront of cutting-edge R&D. They could also play an important part of the government’s efforts to drive high-quality economic growth and job creation across the UK through its “Levelling Up” agenda.

Since the Spring Statement, the Chancellor and wider UK government has doubled down on its announcements regarding its reforms to the UK’s R&D tax regime. Drawing upon a tripart strategy of “Capital, People, and Ideas”, the Chancellor, in a recent speech delivered at the London Tech Week, reiterated his commitment to R&D tax reform, and highlighted the potential benefits of his plans for growth, human capital, and technological progress within the UK economy.

As the government continues to develop its vision for the UK “knowledge economy”, as recently set out in its National AI Strategy, we expect to see a further clarification of the government’s position, along with an outline of how exactly they intend for their vision to function practically .

The government intends to legislate these tax changes in the Finance Bill 2022-23, and according to the government’s current timeline, they will take effect from April 2023. We look forward to hearing more from the government in due course.

We intend to provide regular updates and commentary via our website and social media once new announcements have been made.

If you are interested in discussing how the recent announcements might affect your business, or you are new to R&D tax incentives, and would like to learn more about them, please get in touch with one of our team.

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Citations:

UK Gov: The Chancellor’s Spring Statement – Spring Statement 2022: documents - GOV.UK (www.gov.uk)
UK Gov: Levelling Up the UK – Levelling Up the United Kingdom - GOV.UK (www.gov.uk)
UK Gov: National AI Strategy – National AI Strategy - GOV.UK (www.gov.uk)