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Will restricting R&D Tax Relief to UK activity backfire?

10th March 2022

Speculation around the government’s proposed changes to the R&D Tax Credits regime for companies that subcontract R&D to third parties or engage with workers via agencies (Externally Provided Workers - EPWs) is intensifying ahead of the upcoming budget.

For companies with accounting periods starting on or after 1st April 2023, it has been proposed that R&D relief for qualifying subcontracted activity will only be available where that third party performs the work in the UK, and for EPWs the relief will only be available where these workers are paid through a UK payroll.

UK vs overseas activity?

The key point of the change is to encourage innovation to take place within the UK and incentivise the up-skilling of domestic workers.

The adverse effect of this is that claims will be reduced for those businesses using overseas resource for part of their R&D activities.

Due to a host of factors, there is currently a lack of UK resources, particularly in R&D intensive sectors such as software and manufacturing.

Many companies therefore access overseas resource due to commercial need, meaning that the proposed changes could lead to businesses choosing commerciality or innovation – which will no doubt have an adverse impact on the latter.

In extreme instances it may be that some innovative companies choose to relocate overseas.

The UK is part of a global economy and use of overseas resource is commonplace.

The current proposal to deny all R&D relief for overseas workers involved in R&D appears to be a blunt tool to achieve the government’s intention.

Perhaps the restriction could be based on a proportion of overseas resource spend vs UK resource spend to lessen the blow for affected companies, and reduce the risk of UK innovation being left behind due to an innovation/commerciality trade off.

There is a risk that the proposed changes may achieve the opposite of the intended effect – companies may in fact reduce their spend on innovative activities, or worse yet, relocate overseas and fall out of the UK economy altogether in pursuit of more favourable regimes in other jurisdictions.

Contact us

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

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