Budgets, by default, always throw a juicy morsel or two into the tax relief mix, but Rishi Sunak’s latest announcement was a bonafide feast.
There are a number of changes to R&D tax on the cards, some long-awaited, others providing a potential hurdle for businesses. Meanwhile, the extension of the £1m Annual Investment Allowance limit is to be much welcomed, as is an increase in grant funding.
The announcements on Wednesday came thick and fast and there’s a lot to keep track of, so here’s a brief breakdown of what came up.
R&D tax changes
The most significant changes to R&D tax arise from the consultation into the future of tax relief, as undertaken in March this year. Changes will be legislated for in the upcoming Finance Bill 2022-23, and then take effect from April 2023, at the same time as the Corporation Tax rate rises.
1. One of the most headline-grabbing announcements is the removal of the ability to claim for overseas R&D costs.
This will likely have the biggest impact on entities that rely on overseas support, often seen in software claims, who may not have much choice over where their R&D work takes place. These companies will need to move quickly to on-shore spending in order to beat the deadline and keep claiming the tax reliefs they already enjoy. It will be interesting to see if this is an outright removal of these costs from a claim or a compromise similar to the Australian scheme which allows such costs in very restrictive circumstances.
2. New tax relief qualifying costs covering cloud computing and data are on the horizon.
This is not before time, as this area has seen enormous growth and has become increasingly important to innovating companies. It’s pleasing to see that qualifying costs are being modernised in line with new technologies and trends.
3. The Government will continue to look into ways to tackle abuse of R&D claims and improve compliance.
We await more details on this, but hopefully any steps that are taken will be targeted and specific to ensure companies that are innovating do not needlessly and mistakenly miss out.
The Annual Investment Allowance (AIA) limit of £1m has been extended. This £1m limit was due to end on 1 January 2022, but will now continue until 31 March 2023.
The AIA is a 100% capital allowance for qualifying expenditure on plant and machinery, and this announcement confirms the annual limit will stand at £1m (up from £200,000) for longer than planned.
This will align the end of the limit with the end of the super-deduction, which sees companies investing in qualifying new plant and machinery assets benefit from a 130% first-year capital allowance. This upfront super-deduction allows companies to cut their tax bill by up to 25p for every £1 they invest.
Funding for core Innovate UK programmes has increased by 36%. This increase in funding will likely enable even more businesses to realise their innovations.
The Government plans to spend £1.8bn to bring 1,500 hectares of brownfield land into use. This could result in more derelict land claims through the Remediation of Contaminated Land Tax Relief. This relief is often overlooked and yet is a very generous relief.
There will be an increase in the uplift rate for creative tax reliefs for theatrical productions, orchestra concerts and museum and gallery exhibitions until April 2024.
Proposals are also being brought forward for a new Small Producer Relief. These proposals go beyond the current Small Brewers Relief to reward innovative small cider makers and other craft producers that make alcoholic drinks of less than 8.5% ABV.
Overall, we are pleased to see a continued focus from the Government on innovation as a route to economic prosperity, as well as the resulting commitment to incentivising innovative companies. We’re also reassured by steps towards weeding out misuse of the R&D Tax Relief system. These steps will ensure the right companies receive the right relief and we continue to play an active role in the consultations surrounding this.