In last week’s Budget, the government confirmed its commitment to ensuring the UK remains a competitive place for cutting-edge research.

Although the Chancellor didn’t uncover any extensive or immediate changes to R&D relief in his Budget speech, he did announce the previously announced SME cap will go ahead, and that the government will carry out a consultation of R&D tax reliefs which will run until June 2021.

Definitions – potential for widening the scope?

As part of Budget 2021, the government has stated that it’s important to ensure that the UK reliefs remain up-to-date and competitive.

Supported by a new and broader consultation with stakeholders, there will be a review of the effectiveness of the two R&D tax credit schemes in whether they adequately support the government’s targets for the reliefs and reflect modern R&D practices.

It will consider the possibility of widening the scope of reliefs, what changes might be appropriate to ensure global competitiveness – and if the definition of R&D and rates of relief remain effective.

Alongside the wide-reaching review of R&D tax credits announced at Budget, the government will also build on last year’s R&D tax relief consultation by considering whether to bring data and cloud computing costs into the scope of R&D relief.

SME cap

As highlighted in previous budgets, HMRC is introducing a PAYE cap for SME cashback claims, taking effect from 1 April 2021. Although there’s no restriction on actually making an R&D claim (and using that to reduce a corporation tax bill/generate losses to carry back or forward) the preannounced cap applies to the payment HMRC makes for the surrender of losses.

For accounting periods beginning on or after 1 April 2021, the cap reduces the amount of claim which can be surrendered as a tax credit to £20,000, plus three times a company’s total PAYE and NICs liability.

Under this new rule, companies wholly outsourcing their R&D will only be able to claim £20,000 in payable R&D tax credits, per year.

SME relief and the R&D Expenditure Credit

The official response to a previous consultation that closed in October 2020 was published last week, concerning the effectiveness of the R&D tax regimes, the ease of the administrative burdens and improvement of engagement with HMRC.

Surprisingly, it includes the suggestion of merging the SME relief and the R&D Expenditure Credit (RDEC). This could mean that the RDEC system could be available to all sizes of company, but then with a different rate of relief for SMEs – something to watch out for as more details emerge.

Need more details?

It’s an exciting time ahead for companies looking to benefit from R&D tax relief – and following the consultation now underway – there could be measures to look out for later this year…

At TS Partners, our specialist tax team has a detailed insight into the complexities of the R&D scheme. If you’re likely to be affected by the Budget announcements, or would like to speak about any changes announced following Budget 2021, don’t hesitate to get in touch with our team.