Spring reforms

As part of the Spring Statement in March 2022, the Chancellor confirmed that the government’s goal remains to reform and reduce taxes, which it will undertake through its ‘Tax Plan’, containing three key priorities.

First, it is to take action now to help families with the rising cost of living. Secondly, it intends to cut and reform business taxes, to create a new culture of enterprise. Finally, through further tax cuts, it will share the proceeds of higher growth fairly with working people.

The government also intends to make the tax system simpler, fairer and more efficient through this plan.

We have summarised some of the key announcements in respect of R&D tax relief and capital allowances below.

Research & Development

In Spring 2021, the government announced a review of the R&D reliefs with the objectives of ensuring the UK remains a competitive location for cutting edge research.

In November 2021, the government outlined the detail on a list of measures to reform the R&D tax relief system. These measures included the expansion of qualifying expenditures to cover data and certain cloud computing costs, as well as restricting R&D relief to activity carried out in the UK.

• The government recognises that there are cases where it is necessary to undertake R&D outside of the UK. Legislation will be introduced such that vital R&D undertaken by businesses based in the UK can continue to qualify for R&D tax relief where there is a significant or regulatory requirement for this work to be carried out abroad.
• The government has listened to stakeholders and intends to include all cloud costs in respect of R&D in the scope of R&D tax reliefs. It is expected that this will allow companies to claim for costs related to the storage of vital data, supporting data-heavy research.
• The Chancellor also announced an expansion of the qualifying expenditure to include all mathematics. This reform will support sectors where the UK has a comparative advantage such as Artificial Intelligence and robotics whilst also supporting sectors such as manufacturing and design.
• The Government also intends to increase the generosity of the RDEC scheme (which applies to large companies and those companies undertaking part funded or fully funded R&D work).
• The government will also consider what more can be done to tackle the abuse of R&D tax reliefs, particularly in respect of the SME scheme, ahead of Budget 2022.

The SME R&D tax relief abuse is now being specifically cited as a drain on the Exchequer. The government is continuing the review of R&D tax reliefs with further announcements expected to be made in Autumn. Following the Chancellor’s comments earlier in the year, there remains the possibility of a shake up in the SME regime to ensure that it “delivers the best possible value for taxpayers” which implies that the Government’s view is that it does not currently represent value for money.

Our R&D specialists have a number of years of experience of preparing R&D claims for companies in a variety of sectors. We work closely with companies and their accountants to ensure that any R&D claims are robust and in line with HMRC’s latest guidelines. If you have any queries in respect of the above, please do not hesitate to contact Zeeshan Khilji, who heads up our R&D tax offering.

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Capital allowances

Investment is a key driver of productivity growth and investments. The government is delivering on its ambitious capital plans and will invest over £600 billion in public sector gross investment over the next 5 years. In March 2021, the government announced the generous super-deduction, which is due to end in April 2023. The super-deduction allows companies to write-off the costs of certain categories of qualifying plant and machinery investments against taxable profits at a rate of 130%.

Ahead of April 2023, the government is considering reforms to best support future business investment. The government’s objective is to ensure that any future support is in line with the government’s fiscal objectives. As part of this objective, the government will look at how certain reforms could ensure the UK remains a competitive place to invest.

Below are some possible illustrations of the types of changes that the government could make:

• Increase the permanent level of the Annual Investment Allowance, for example to £500,000.
• Increasing Writing Down Allowances for main and special rate assets from their current levels of 18% and 6% to 20% and 8%. This would especially support those businesses investing above the permanent Annual Investment

Allowance level.

• Introduce an Additional First Year Allowance, to bring the overall amount that can be claimed to greater than 100% of the initial cost.
• Introduce full expensing, to allow businesses to write off the costs of qualifying investment in one go.

The government is considering options ahead of Budget later this year, and as part of this will continue to review the latest evidence, including the impact of the super-deduction and views of businesses.

It is great to hear that the Chancellor has recognised in his Spring Statement the vital importance of capital investment to help drive higher growth. It is promising to see that the government intends to consult about making the capital allowances rules more generous to support future business investment.