The Autumn Budget’s impact on R&D tax relief

Rishi Sunak’s Autumn Budget will come as welcome news to many given the Government’s continued pledge to invest in Research and Development (R&D) activities. This will be seen as a key driver of the UK economy in an effort to promote the UK as an innovation hub.

Alongside the pledge to invest £22 billion into UK R&D activities by 2026-27 via funding mechanisms such as Horizon Europe and Innovate UK, much-needed consideration has also been given to claimable costs under the R&D tax incentive scheme.

For many years tax advisers have tussled with HMRC over the eligibility of cloud computing and data (hosting) costs due to their intrinsic link to R&D activity. It is pleasing to see this extension to qualifying expenditure within the regime and this change will be welcomed by many companies, particularly those offering digital services.

In particular instances, such costs of this nature may have qualified as software expenditure during the creation of digitally developed products. On the other hand, storage and data costs simply did not qualify under the relief.

Cloud computing and data costs qualify from 1^st April 2023, and as such careful planning should be given to the timing of such costs.

Another reform stems from the source of R&D expenditure. It is believed that just over half of the total £47.5billion of R&D expenditure was incurred in the UK, with many companies benefitting from claiming overseas costs. The Government is mirroring the approach adopted by countries such as Australia and the USA where no relief is provided for costs incurred overseas.

The move to support UK innovation was not previously possible whilst the UK remained part of the EU. Again, these changes will take effect from April 2023.

The final interesting point of note on R&D within the Chancellor’s Autumn Budget relates to plans to tackle abuse of the existing regimes, alongside improved compliance. The plans to address this will be set out by the Government later this Autumn.

Reform in this area is well needed, given the influx of spurious claims led by poor tax advice and understanding of the legislation.