Autumn Budget 2021: R&D tax incentives key to keeping the UK at the forefront of innovation

UK chancellor Rishi Sunak’s second Budget of 2021 was full of bold ideas and ambitious new plans to stimulate growth and investment in the UK. Innovation and Research & Development (R&D) tax relief are seen as an integral part of the vision.

The key reforms for R&D relief, which will take effect from April 2023, will:

• “support modern research methods” by expanding qualifying expenditure to include data and cloud costs.

• more effectively capture the benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK. (Currently, there is no requirement that the R&D activity must be undertaken in the UK for companies to be eligible for R&D tax reliefs. UK companies that incur R&D overseas may still be eligible for full tax relief. However, the government has said it wants to ensure that the reliefs incentivise UK innovation and are appropriately targeted in a way that best benefits UK industry).

• target abuse and improve compliance.

The government confirmed that it has pushed back the timeframes for achieving its target of increasing public R&D investment to £22 billion from 2024/25 to 2026/27. However, it made clear its  continuing aim of increasing investment to £20bn by 2024 and the fact it remains committed to its target of increasing investment in R&D to 2.4% of GDP by 2027. This is really positive news.

We now await the imminent government response to the full R&D tax relief system consultation published in March and opened with the aim of ensuring that the UK “remains a competitive location for cutting edge research, that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted.”

The consultation leaves few options off the table but broadly, the scope of the review was to consider whether to expand the definition of R&D; continue to maintain two separate relief systems for larger and smaller businesses; introduce changes to how the system is administered; and introduce territoriality requirements to make the reliefs more targeted.

As with most tax announcements, the devil will be in the detail but it’s really encouraging that the Government is listening to feedback and is open to fresh ideas. This will help to ensure that, 21 years on from its introduction, the R&D tax incentives regime can keep pace with the fast-moving ways that R&D is carried out in the UK, and focus incentives where they will support businesses, drive investment decisions, and keep the UK as a favoured location for innovation.