How did the Autumn 2021 Budget affect R&D tax reliefs?

Following the announcements in the Autumn 2021 Budget by Chancellor Rishi Sunak, we take a look at what is happening to Research & Development (R&D) tax reliefs for companies.

We are all aware that even amongst an overriding theme of reduced reliefs and increased tax rates following the record levels of support given during the economic shock of COVID, the incentivisation of high-tech industries and technologies will be fundamental to revitalising the UK’s fortunes in a new post-Brexit world.

However, whilst there was ambitious talk from Mr Sunak about building the UK’s status as a science superpower, there wasn’t much in the way of an origin story contained in the Autumn 2021 budget.

R&D credit surrender rate

Following the announcement of the future increase in the rate of Corporation Tax in the March budget (25% for all profits above £250,000, 19% for those with profits of less than £50,000 with a taper rate for profits between these limits, effective from 1 April 2023), many of us that work closely in R&D reliefs had been waiting with baited breath to learn whether a corresponding uplift would be made to the “credit surrender rate” (currently 14.5%) for the Small Company R&D scheme.

As such, given that most of the biggest changes had been leaked before the announcement of the budget to parliament, we really only had one question on our mind as we watched Mr Sunak show the press the famous old red box as he left No. 11; what would the credit number be after the budget? 

But alas, as the budget was read, it was clear that in this circumstance no news was bad news for innovative companies.

Although a consultation had been announced, and welcome minor additions planned to the categories of qualifying expenditure (for data and cloud computing costs), there was no announced uplift to the credit surrender rate, and one seems unlikely to materialise from the planned consultation.

So where does this leave the UK’s innovative small and medium sized businesses, as the backbone of the much-vaunted scientific superpower?

Surrender of R&D augmented losses

As there has been no change, it is still vastly more beneficial for companies to carry forward losses until the companies make a profit, where they will be relieved at a rate of between 19 & 25%, as opposed to surrendering these losses for a cash credit of 14.5%.

Example

A company has the following results:

• £500k taxable loss in year ended 31 March 2023 (with £200k of R&D qualifying costs in the year)
• £500k taxable profit in year ended 31 March 2024

The company will potentially pay £48,300 more tax over the two years as result of surrendering their R&D augmented trading loss, as opposed to carrying it forward (assuming no other losses).

However, as we all know, many innovative businesses require cash as soon as possible, so I suspect that many will be unable to take advantage of this discrepancy, something of which Mr Sunak and his Treasury team will no doubt be aware.

Looking at the potential tax disadvantage to the company with 200k of qualifying expenditure, the potential discrepancy in tax over two years where it moves from a loss to an equally profit-making position could see the company experience a cash tax disadvantage of £48,300.

As such, unless there is an unexpected surprise arising from the consultation, it is likely that innovative businesses may be forced to choose between the cash they need now, and the best cash benefits in the long term. 

Further, the rate of corporation tax increases to 25% from 1 April 2023, so R&D losses incurred while the rate is 14.5% (credit) / 19% (offset) will be available to offset at 25% when the rate increases.

Companies may wish to discuss their plans for the use of any R&D enhanced losses before taking any action in order to gain the greatest benefits.

New categories of qualifying expenditure for R&D

Whilst there wasn’t huge amounts of detail on the inclusion of data and cloud computing costs in the Budget announcements, it seems reasonable to take these at face value.

Companies may wish to work with their advisors to isolate these costs in their next claims, and we await official guidance as to when the changes will come into force.

Incentivising R&D reliefs in the UK

Whilst detail was pretty thin on the ground in relation to how the Chancellor plans to refocus legislation to target reliefs at UK activity, it seems very likely that he was referring to subcontract R&D costs, which currently attract relief at 65% of expenditure (in the absence of a connected party election).

This subcontract work can currently be performed in any part of the world, provided the company claiming the relief and that owns the resulting intellectual property is tax resident in the UK.

If this relief is curtailed or restricted in some way, this could cause many businesses to have to re-evaluate the benefit of potentially cheaper non-UK subcontractors, versus the tax cost of no longer being able to make an R&D claim in respect of these costs. 

Contact us

In combination with the above changes to the credit-benefit calculation, good planning has never been more important at the outset for innovative businesses.

If you would like to discuss your R&D planning further, please contact any of the R&D team at Bishop Fleming.

Full Budget Summary and Tax Tables

You can download the full summary and tax tables here:

• Full Budget summary
• Tax Tables 2022/23.