R&D Tax Credits in the Spring Budget 2023: What has Happened and What Next
techUK has been advocating to defend, reform, and grow crucial R&D tax reliefs support for the tech sector, through working to reverse damaging cuts to SME R&D tax credits, advocating for the expansion of the definition of R&D and supporting prioritisation of stability in tax regimes to attract lasting investment.
R&D tax credits are critical for the technology sector and the whole of the UK’s innovation ecosystem. For industry, the R&D tax credit is a leading reason why many choose to place R&D activity the UK. This is largely due to the generosity of the scheme and its focus on incentivising R&D activity in general, but with multiple changes to R&D tax credit schemes over the past year, industry is being forced to re-evaluate if and how it invests in R&D. By working with Government to get R&D right, techUK aims to support industry’s ambitions to grow and drive innovation in the UK.
techUK has been engaging with industry and the Government to develop and drive consensus on how to make R&D work better for the tech sector. In submissions to consultations and the Budget, media advocacy, and cross-sector collaboration, techUK has focused on the below key areas:
SME R&D tax credit cuts
Creation of a new, simplified scheme
RDEC increases and reform
Overseas R&D changes delayed
SME R&D Tax Credits: techUK advocated strongly to protect R&D tax relief support for SMEs in the UK, with the Government reintroducing narrow support for a select set of R&D-intensive SMEs.
In the March Budget 2023, the Government announced that although it maintained cuts to the overall SME R&D tax credit scheme, the Government has revisited the generosity under the scheme for a small set R&D intensive SMEs. From 1 April 2023, loss-making SMEs with at least 40% R&D expenditure out of total will be eligible for a higher payable credit rate of 14.5% for qualifying R&D expenditure. Though this 40% intensity threshold works for some tech SMEs, techUK believes that the threshold should be lower to better include the tech sector R&D intensive firms.
In the Autumn Statement 2022, summarised by Leyton’s guest insight, the Government announced that the small and medium-sized enterprises (SME) additional deduction will decrease from 130% to 86%, and the SME credit rate to decrease from 14.5% to 10%. Members cited concerns that their bottom lines and long-term investment decisions would be seriously altered, resulting in either shifting their R&D outside of the UK or reducing it altogether, which presented a major concern for the future of UK innovation.
techUK engaged in advocacy with industry across the UK to deliver a message to Government to reverse the damaging cuts to SME R&D tax credits. techUK’s message was to reverse the cuts or introduce a tightening mechanism to preserve support for R&D-intensive SMEs. Through direct engagement with HMT and Government, a response to an HMT consultation, the Budget submission, and media advocacy, techUK fought to find a solution for SMEs.
Moving forward, techUK will work with members and the Government to maintain the discussion on the announced changes and to advocate for a decreased intensity threshold. Members are encouraged to engage with techUK to help deepen the broader picture of the effects of the cuts to the overall scheme and the newly announced threshold.
Creation of a new, simplified scheme: techUK responded to Government consultation on the design of a new scheme, driving a message that Government R&D tax support needs to focus on stability, simplicity, and being industry-tailored.
On 13 March 2023, the government concluded its public consultation on the design of a single scheme, which weighed questions on the balance of SME and RDEC scheme mechanics, support for specific industries, and a broader view on R&D tax credit support. techUK’s response, which can be found here, drove the message that the consultation was missing the point of the current debate in R&D tax credit support and that much more consultation with industry is required for a new scheme to succeed. techUK’s high-level messaging that stability in R&D tax credit support is necessary was also prevalent in the consultation response.
The Government is still considering implementing this scheme for a start date of 1 April, 2024, but has not announced which portions of the RDEC or SME schemes would be included in a new scheme. Further details will be announced at a future fiscal event. The Government looks to further engage with industry as it explores the creation of a new scheme, and techUK will work with members to ensure that any further changes are functional and industry-tailored.
R&D Expenditure Credit (RDEC) increases and reform: techUK advocated to maintain increases to and expand capital incentives in the RDEC rate, with the increases maintained but no movement on capital incentives inclusion.
Another component of techUK’s advocacy has been to protect increases to the RDEC scheme that were announced in the Autumn Statement 2022. The Government did not reverse its increased generosity for the world-leading RDEC scheme, and techUK will work with industry to capture the importance of increased generosity support for the UK’s innovation ecosystem.
techUK has further outlined the need for reform to capital incentives to boost investment in new plants, labs, and machinery. In its Budget submission and R&D consultation, techUK pushed to expand the RDEC scheme to cover capital expenditure such as new plants and machinery. Though the Government is expanding the scope of qualifying expenditures to include the costs of datasets and cloud computing, it missed a critical window of opportunity to also include other key growth sectors, such as software development.
Moving forward, techUK will continue to engage the Government on the inclusion of these capital incentives in further RDEC reform and/or in the creation of a new, simplified R&D tax credit scheme.
Overseas R&D changes delayed: industry requests for stability in R&D tax relief schemes landed in some parts of the Budget—namely the Government delaying the implementation of changes to overseas R&D claims.
The previously announced restriction on some overseas expenditure will now come into effect from 1 April 2024 instead of 1 April 2023. This will allow the government to consider the interaction between this restriction and the design of a potential merged R&D relief. Moving forward, techUK will work with members and the Government to understand how the timeline of changes to overseas R&D tax reliefs will develop and whether this policy belongs in a new scheme.
What’s next for R&D:
Despite the March Budget 2023’s announcements, the Government still has plenty of work to do on R&D tax credit reliefs. Moving forward, techUK will engage with industry and Government to reverse damaging cuts to SME R&D scheme; maintain increased generosity in and reform of capital incentives in the RDEC scheme; and the promotion of stability, simplicity, and industry-tailoring for R&D support strategy.