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ForrestBrown - Budget: Reforms to R&D tax relief

Posted on 15 March 2023

Responding to today’s Budget, Jenny Tragner, Director and Head of Policy at the UK’s leading R&D tax relief consultancy, ForrestBrown, said:

“Today’s Budget was peppered with positive policies to encourage innovation but lacked a coherent narrative to help businesses navigate an increasingly complex tax landscape.  

“The Chancellor set out his stall to harness British ingenuity, so it is fitting he has taken an inventive approach to reforming R&D tax relief. However, while enhanced support for SMEs is welcome, the qualifying criteria introduces further complexity for businesses already struggling to make sense of the raft of reforms announced at previous fiscal events and set to come into force this April. A higher tax credit will be available for R&D intensive SMEs – those whose R&D expenditure equals at least 40% of total expenditure.

“This new measure will ease the blow of last Autumn’s rate decrease for some businesses, but as well as the complexity added, applying the more generous rate only to loss makers risks penalising businesses once they become successful. All of this for a change which the government proposes is superseded by the introduction a new singe scheme for R&D tax relief next year.

“Hidden in the documents published alongside the Budget speech is confirmation that the measures to restrict R&D relief on overseas R&D activities will be delayed for a year to enable further consultation and consider how these rules will work alongside the proposed combined future incentive. It was encouraging to see that the government has listened to feedback, with potential for mitigating measures to be included in the design of the new single scheme.

“By contrast, capital allowances have been simplified with the introduction of full expensing, which had been widely trailed in the media following substantial pressure from business and industry groups. A successor to the super deduction is welcome. We still lack a tangible incentive for capital investment in R&D facilities and assets.

“Investment zones could also provide a catalyst for regional innovation, with the spillover effects of R&D investment widely recognised. More than seven out of ten UK companies decide where to invest in innovation based on tax incentives and grant funding, so creating a supportive ecosystem for R&D can clearly be a powerful tool for levelling up. But it is concerning that no region south of Birmingham is set to benefit.

“The announcement of £20bn of support for early development of carbon capture, usage and storage (CCUS) could also be a game-changer for innovative businesses in this emerging sector – but ensuring they take an optimal approach to grant-funding and tax relief will be important to delivering the maximum benefit.

“Measures to support cutting-edge sectors such as Artificial Intelligence and quantum computing with direct funding budgets are also positive, but while grant funding by its nature requires the government to ‘pick winners’, it is important that tax incentives do not become so restrictive that we risk missing the next emerging technology – whatever it might be.”