On March 11th, the UK is set to adopt a historic Budget under newly minted chancellor Rishi Sunak, making it the first under Boris Johnson and the first Budget after the UK’s dramatic departure from the European Union.
This is the stuff of history not only in light of Brexit but also because of the crushing Labour Party defeat in the recent elections and the powerful Conservative Party mandate to implement the commitments in its manifesto. Together with the looming threat of the spreading global coronavirus pandemic, these are unprecedented times of uncertainty and hope for the country and its economy.
As is tradition, we’re throwing our hat in the ring and making some predictions related to one of the subjects we’re most interested in - R&D tax incentives. Our method is far from scientific and we’re not known for our psychic abilities, but with some extrapolation, a little luck and a close eye on the Conservative Party manifesto, some trends do emerge.
What could change for the R&D tax credit in the 2020 Budget?
Encouraging signs for the SME scheme
Changes to the definition of R&D for selected sectors
The industries that have been highlighted for growth by the Conservative Party’s manifesto include cloud computing and data. Currently, qualifying R&D is interpreted strictly in these areas as they are often infrastructure-based and not as reliant on software as other tech subsectors. The new government promised to review the definition of R&D for these areas as their growth is tightly linked to increases in productivity. This aligns with the commitment to decrease the UK’s productivity gap with other developed nations, which has been blamed for the country’s slow wage growth and its similarly sluggish growth in tax receipts.
Preventing abuse of the tax credit
As the R&D tax credit scheme in the UK is highly lucrative, it is a definitive incentive for companies to incorporate in the UK, even if they do not plan on doing much else in the country. Noticing a worrying trend in the types of companies claiming R&D tax credits under the SME scheme, in 2019, the Government announced measures that aimed at preventing companies with little economic footing in the UK from taking advantage of the cash incentives created by the credit. The first time this measure was announced was the 2018 Budget, but we do not expect this direction to change. This means that from the 1st April, the R&D tax credit under the SME scheme could be capped at three times the company’s income tax and National Insurance payments (NICs) liabilities under the Pay As You Earn (PAYE) scheme. This measure will surely make it harder for companies to abuse the R&D tax credit, but without proper regulatory framing, it will also hurt burgeoning startups. It is not uncommon for founders who recently set up a company to be using developers in lower-income countries in conjunction with local talent to develop innovative products. At the MVP stage of a tech company’s growth, PAYE does not make economic sense, so there may be a need for concessions in this area to avoid affecting the dynamism of the UK’s tech sector.
RDEC: An increase in the benefit
This one comes straight out of the Conservative Party election manifesto:
We will increase the tax credit rate to 13 per cent and review the definition of R&D so that important investments in cloud computing and data, which boost productivity and innovation, are also incentivised.
The promise is to increase the tax credit rate available to companies carrying out eligible R&D from 12% to 13% of the qualifying expense. As tax applies on top of RDEC, the real benefit/offset rate would change from 9.72% to 10.53%.
We would expect this to be reflected in Rishi Sunak’s Budget, as it is a concrete and high-profile measure and very much in line with the direction announced by the government for the future of innovation in the UK.
Conclusion
We are living in exciting times for innovation in the UK and the country’s new government remains committed to continuing on the path of setting the right incentives for growth. Even amid coronavirus concerns, the R&D tax credit seems to be an area where stability reigns. However, we’re very curious if these predictions will turn out to be correct and what other incentives for innovation the new budget may hold.
We’re also curious what you think the 2020 Budget will bring - let us know in the comments if you have your own predictions.
