MHA | Changes to UK R&D Schemes and its impact on the Tech Sector

Changes to UK R&D Schemes and its impact on the Tech Sector

Scott London-Hill · February 10th 2023 · read

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Changes to R&D Tax credits scheme

Significant changes to the R&D Tax credits scheme have been announced over the past year, with the Autumn Statement followed by draft guidance ahead of reforms to the schemes which, according to the government, will:

  • Refocus support towards innovation in the UK.
  • Target abuse and improve compliance.
  • Ensure public money is spent effectively and best supports innovation.

Although these targets seem logical, the methodology may have unintended consequences for companies in the Tech sector, which could be detrimental to the industry.

International Workers:

The Government first announced plans to restrict international subcontractors and externally provided workers (i.e. Staff sourced via agencies) in the Autumn Budget 2021 and have re-affirmed their intention to apply this for Accounting Periods starting after 1 April 2023. Our previous article speculated on what may be deemed Qualifying Overseas Expenditure (QOE) and it seems HMRC will be taking a harsher stance, which is likely to disproportionally impact legitimate companies within the Technology sector.

This follows from our participation in the recent R&D Consultation Forum (RDCF), where it was stressed by HMRC that cost and availability of workers would not constitute an allowable exemption. While restrictions for pure cost related reasons was expected, the restriction on availability of workers will be an additional adverse impact, given the difficulty in scaling a team in the UK quickly (compared to Poland or India where established development houses can be used rapidly and flexibly).

We expect to see a variety of scenarios where work is not impossible in the UK but is also not practical, which will need to be assessed on a case-by-case basis.

Rate Changes:

For expenditure on or after 1 April 2023, the SME additional deduction will decrease from 130% to 86%, and the cash credit rate (rate at which R&D enhanced losses are surrendered for cash) from 14.5% to 10%. This is an adverse change, particularly for those companies in the startup phase. Within the Tech Sector, a disproportionate number of companies tend to have high expenditure in early-stage development, and it may be years before their product is launched. Currently, the generosity of the scheme and cash benefit is a crucial lifeline to such companies, providing an additional safety net, and gives investors confidence that their funding is safe. This also allows the company to fully focus on technical activities rather than diverting precious resources into raising capital.

Whilst the benefit for profit making companies is not impacted as much, those which need cash the most have been unfairly impacted. This combined with cheaper wages and improved availability of workers abroad, means it is likely companies may begin to consider if the UK is the right place for their business.

In more positive news, the RDEC rate for large companies has increased from 13% to 20%. This will also aid SMEs which have been subcontracted R&D by a large company, or where their R&D has been subsidised in some way, for example, paid for upfront by a client.

Administration Changes:

A raft of administrative changes have been announced for accounting periods starting on or after 31 March 2023, with the intention of reducing fraud and improving compliance. Of note there will be requirement for new claimants to make notification of their intention to claim within 6 months of the year end. Companies are therefore at significant risk of missing out on claims simply by not being aware of this change in procedure!

In addition, further information will be required with the claims including a description of the R&D activities. It is important therefore that companies claiming are aware of the new requirements and seek guidance.

Takeaways

Despite these changes, the UK R&D scheme will remain a useful and worthwhile tool, helping companies to grow and invest despite a challenging economy.[LHS4] 

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