UK research and development tax reliefs under review

At Budget 2021 the government announced a review of research and development (R&D) tax reliefs, supported by a consultation seeking views from stakeholders. The government hopes that, by reducing the costs of innovation, R&D tax reliefs will play a key role in achieving its ambitious target to raise total investment in R&D to 2.4% of UK GDP by 2027.

Structure and administration of the scheme

Currently, the two principal tax reliefs available to companies undertaking R&D in the UK are as follows:

• R&D Expenditure Credit (RDEC): an "above the line" credit equal to 13% of qualifying R&D costs
• R&D tax relief for small and medium enterprises (SME scheme): an additional deduction of 130% of qualifying costs from an SME’s profits on top of the normal 100% deduction, and, if lossmaking, a tax credit worth 14.5% of the surrenderable element of that loss.

To qualify for relief, expenditure on R&D must be incurred on particular types of activity, currently limited to staffing costs, consumable or transformable materials (such as water, fuel and power of any kind), certain types of software, payments to clinical trials volunteers and, depending on the relief, some subcontracting costs.

The consultation

The government aims to maximise the additional R&D expenditure generated for each additional pound of tax (additionality) foregone under the R&D schemes, and ensure that administrative complexity is kept to a minimum. To achieve this the consultation asks stakeholders to consider:

Unifying schemes

The benefits and disadvantages of consolidating the two schemes into a single coherent system. The consultation proposes “RDEC for all”, with a higher rate for SMEs as a potential solution. 

Claims process

Changes that might help claims to be dealt with more smoothly, while ensuring better compliance. This follows growing concerns that the current claims system does not provide adequate controls over the allocation of the increasingly large sums of tax reliefs being given for R&D.

International competition

Whether the rates of relief offered for R&D are internationally competitive, noting that the rate of relief provided by the SME scheme is significantly more generous than that provided by the RDEC when compared to global competitors. However, some countries with higher rates of relief achieve lower rates of additionality, where investment decisions would have proceeded without relief.

Qualifying R&D

Whether there are valuable activities that might currently be excluded from the scope of the reliefs, and for which a case can be made in terms of their economic value for example, data and cloud computing.

Varying rates of R&D support

In line with other countries who have varied their rates of R&D support by sector and activity, whether this could be used to incentivise R&D with specific social value, for example developing green technology.

Claiming outside London and South East

How the offer of R&D tax reliefs could be improved to better support R&D in different regions across the UK as opposed to London, the South East or the East of England, where claims tend to be concentrated.

Expenditure outside the UK

Recognising that the spill over benefits are likely to be greater where activity takes place domestically; whether there should be provision in the R&D tax reliefs requiring expenditure to take place in the UK.

The UK Patent Box

In conjunction with the R&D tax relief schemes, UK companies can take advantage of the Patent Box if they are liable to pay Corporation Tax and if they are currently making a profit by exploiting patented inventions and/or other qualifying forms of IP. Companies who elect in to the Patent Box will pay a reduced rate of Corporation Tax at 10% on all relevant IP income from qualifying IP rights. The Patent Box will be increasingly beneficial to eligible companies as the UK corporation tax rate is set to rise from 19 percent, to 25 percent, from 1 April 2023.