The impact of R&D tax relief reforms on UK tech businesses
Thu 30 Mar 2023
In recent years, tracking changes to the UK tax system has become increasingly challenging due to rapid adjustments during the pandemic and unforeseen political u-turns, such as the cancelled dividend tax rate reduction. For numerous UK tech firms, the generous R&D tax credit scheme has been a crucial lifeline. However, the upcoming R&D tax relief reforms are set to impact these businesses significantly.
Chancellor Jeremy Hunt announced during the Autumn Statement that, from 1 April 2023, R&D tax reliefs would undergo reform. The additional deduction for SMEs will be reduced from 130% to 86%, and the SME credit rate will fall from 14.5% to 10%.
What are the Research and Development Tax Relief Reform Changes?
The R&D tax relief reform changes will impact companies claiming R&D tax relief under either the Research and Development Expenditure Credit (RDEC) scheme, the SME R&D relief, or companies that have made a Patent Box election.
R&D tax reliefs play a crucial role in incentivising R&D investment by reducing the costs of innovation. The UK Government announced several measures following the review of R&D tax reliefs launched at Budget 2021. These measures will apply for accounting periods beginning on or after 1 April 2023.
With the aim of encouraging R&D using modern computational approaches, the Government is extending the scope of qualifying expenditures to include the costs of datasets and cloud computing.
To address abuse of the reliefs, all claims to R&D reliefs must be made digitally and accompanied by a compulsory additional information form. Companies must also inform HMRC in advance of their intention to make a claim.
Several changes will be made to correct anomalies. These include allowing companies to claim RDEC instead of erroneous SME relief claims, clarifying expenditure qualifications, and amending the time limit for making a claim.
The economic impact of these reforms is not expected to have significant macroeconomic effects but will affect the administrative burden of approximately 90,000 businesses claiming R&D tax reliefs.
Impact of R&D Tax Relief Reforms on Tech Startups
Startups in the tech sector will be significantly impacted by these changes.
A survey published by the Coalition for a Digital Economy, the policy voice of startups, found that the average startup is expected to lose £100,000 due to these changes.
Out of more than 250 UK founders surveyed, 97% said that the cuts would severely affect their businesses, and 89% agreed that the reforms would make the UK a less attractive destination for startups.
Dom Hallas, Executive Director of Coadec, said: “This data is clear – startups are terrified of the changes planned for April this year. If the Government goes ahead, it will crush some companies and damage many others. The outcome would leave the jobs and innovation engine of the British economy severely damaged for years to come. We hope the Government reconsiders.”
How will the R&D Tax Relief Reforms Impact Future Investments in the UK Tech Industry
The reduction of R&D tax credits will inevitably lead innovative tech firms to reconsider future investments. Chancellor Jeremy Hunt cited fraudulent claims as a key reason for lowering these tax rebates, while simultaneously increasing credits available to major businesses.
Enterprises in industries that typically require years of loss-making innovative activities, such as AI and biotech, will be most affected by this shift. Many will be forced to cancel projects or move investments outside the UK to countries with more attractive R&D credit systems.
Competition Among European Nations for Tech Investments
The UK, and London specifically, have long been at the forefront of tech activity in Europe. However, other European nations are actively trying to claim the tech investment top-spot from London, with hits to the attractiveness of the UK investment ecosystem bolstering foreign countries.
While the UK and London have long been at the forefront of tech activity in Europe, other European nationals are actively trying to takethe tech investment top-spot from London, with hits to the attractiveness of the UK investment ecosystem boosting foreign countries. Competition for investment in the European tech landscape could become fiercer as a result of these R&D tax relief reforms.
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