In line with the announcements made in the Queen’s Speech in December, the Chancellor has set out an ambitious target for research and development (R&D) spending in the UK in his first budget. The government is clearly committed to encouraging businesses to invest more in their R&D spending and move towards their 2.4% target.
The three tax changes relating to R&D tax relief are:
The rate of R&D Relief Expenditure Credit (RDEC) is to be raised from 12% to 13% from April 1st 2020.
An increasing number of SMEs now claim RDEC on certain categories of expenditure (e.g. subsidised expenditure). As the RDEC relief is significantly less attractive than the SME relief, the increase will welcomed by them as well as large companies.
PAYE/NIC cap for SME relief
Following consultation last year, the introduction of the PAYE cap on the payable tax credit in the SME R&D schemes will be delayed until 1 April 2021. The government has listened to industry and will also consult on changes to the cap’s design, to ensure it targets abusive behaviour as intended while ensuring that eligible businesses are able to access the relief.
Consultation on R&D tax credit qualifying costs
Also announced was the plan to review R&D related costs in relation to cloud computing and data, given how crucial these components are becoming in everyday development.
R&D in Cloud Computing
The cloud computing landscape itself has changed dramatically over the past decade, and so with it its definition. There has been a very high growth in the adoption of cloud computing as a whole.
With Gartner estimating $266 million being expended on the global public cloud service market in 2020, an increase of 17.3% since 2018; it is safe to say that there has been a big shift towards cloud technology. Forbes also estimate that 84% of organisations will have their workload in the cloud by the end of 2020.
With such numbers set to continue to rise into the next decade, it was only a matter of time before current regulations would need to be changed to reflect the increase in the development and use of cloud native applications and technologies.
The budget announcement recognises how prevalent cloud computing is becoming in the new wave of technology development. As such, qualifying costs for elements of computing within software development, historically a grey area, will now be reviewed in the hope of creating clearer guidelines.
R&D in Data
With the advent of artificial intelligence and machine learning algorithms, data is fast becoming a significant cost in research and development. A large amount of data is needed to automate analytical model building and produce reliable, predictive results. There has been an upward trend for how many companies now need data as a part of their development cycles.
Guidelines on how data qualifies has been a notoriously vague, and as a subsequence have created a grey area. Now, HMRC will be reviewing how they qualify data costs attributable to R&D projects. This is testament to how crucial data is proving within the R&D cycle.
Making sure that your company is evaluated by experts within the R&D landscape is key, given the latest changes to the R&D Tax Credits scheme, in relation to software claims. With the fast-paced nature of software itself, HMRC are doing all they can to try and stay ahead of the curve. This, in addition to the sheer rise in the number of claims being submitted for technology companies, has meant that software claims are being reviewed more vigorously than previously done.