Following a budget aimed at making the UK a ‘science and technology superpower’, two major changes have been announced to R&D tax reliefs.
Cloud computing and Data are now an eligible R&D cost
In a positive move, expenditure relating to cloud computing and data will be included within eligible costs. This is something that Menzies have long lobbied for and should serve to update and simplify the current rules to reflect the changing scope of modern software usage.
R&D tax incentives for UK innovation
The second, more fundamental reform will see R&D tax incentives refocussed to better support and incentivise innovation taking place in the UK, and not that undertaken overseas. Full details of the reforms have not yet been published but if this scheme mirrors R&D schemes such as Australia, Canada, Switzerland, and the United States, this could see all non-UK costs excluded.
While targeted to prevent spurious claims from overseas R&D groups that establish an artificial UK headquarters to benefit from the UK’s generous R&D tax regime, this reform will also catch innovative companies or groups who are benefiting from an increasingly mobile modern workforce to recruit key staff where they can access critical skills, cheaper overseas labour or access strategic markets. This is a potentially significant issue for cutting edge businesses as local talent is not always available leading them to recruit overseas. In addition, the growth of globalized businesses has increasingly led to organisations sharing a workforce across jurisdictions.
When can you benefit from these changes?
These changes are set to take effect from 1 April 2023. However, innovative organisations that use overseas entities or globally mobile workers to support their R&D should consider the cost-benefit analysis of their position. Are you, as the Government hopes, better off keeping all R&D activity in the UK with the benefit of R&D tax incentives, or do your original business reasons for relying on overseas workers outweigh the potential tax benefits?
The answer is likely to depend on business’ individual circumstances as well as the full details of the reforms, to be released later this Autumn.