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Budget 2020 ushers in new era of R&D investment

Director & Head of Policy
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March Budget 2020 R&D changes
Thrust into the spotlight a few short weeks before the Budget and with a disease pandemic on the loose, the new Chancellor, Rishi Sunak, unveiled a budget mostly focused on COVID-19 – but with a few welcome announcements for UK businesses.

As with the news headlines, coronavirus dominated this year’s Budget speech. There were immediate shots in the arm announced by the Treasury in the form of government loans to mitigate coronavirus business interruption, and – for those with less than 250 employees – refunds of statutory sick pay costs up to 14 days.  

But Sunak’s focus wasn’t limited entirely to the near-term worries around COVID-19. There were plans for the UK’s economy and infrastructure beyond this crisis alone. 

RDEC rate increased to 13% 

The new Chancellor reiterated this government’s aims to increase public R&D investment to £22 billion per year by 2024-25. According to March Budget documents, this investment will take “direct support for R&D to 0.8% of GDP”, placing the UK among the top quarter of OECD nations. 

This is good news. As always, though, the devil is in the detail. The overall increase in R&D investment is welcome, but we won’t know the precise details of how this £22bn will be spent until the results of the comprehensive spending review are published. 

What we do know, though, and this one was mentioned in the Conservative election manifesto, is that the RDEC rate will be increased from 12% to 13% from 1 April 2020. The cost of this being offset by reducing the lifetime limit on Entrepreneurs’ Relief gains from £10m to £1m eligible for relief. 

Not quite a 1% increase 

The 1% increase in the RDEC rate is, of course, not exactly 1%. RDEC is taxable, so businesses claiming won’t see every penny of that increase. As of 1 April, 2020, the R&D tax credit rate for RDEC will be worth up to 11p for every £1 spent on qualifying expenditure. 

RDEC benefit rate table
How RDEC is calculated

RDEC is the large company incentive. Nearly 5,000 big businesses claimed the relief last year and it is they who stand to claim the lion’s share again. But let’s not forget that certain SMEs use RDEC, too. Grant funded SMEs, among others, can only use RDEC and just under 4,000 SMEs claimed RDEC in 2018. 

But, while the RDEC increase is good and won’t go entirely to big businesses, Sunak is none-the-less guilty of the same linguistic sleight of hand that Chancellors before him have used, lumping the SME tax credit and RDEC into the same category. 

Sunak boldly stated that the increased RDEC rate will amount to a £2,400 increase “on a typical R&D claim”. But RDEC is not the “typical R&D claim”. In true terms, an increase in RDEC rate only benefits 10% of claimants of R&D tax incentives. 

Over 50,000 British businesses won’t get increased R&D funding because they claim through the SME R&D incentive, which hasn’t seen an increase this time or since 2015. Is this money being targeted fairly and at the right businesses?  

Why is the government targeting big businesses? 

The purpose of the R&D tax incentive is to stimulate private sector investment in innovation. It’s clear from the Chancellor’s speech that increasing this investment in innovation is an absolute priority.  

Big businesses spend the most on R&D (£21bn in 2018) and by increasing the RDEC rate, the government will get substantial bang for its buck. Businesses often spend the R&D tax credit benefit they receive on funding the next big push in their R&D work. 

Any hope of the government beefing up the SME tax credit will have to wait, however, until Britain’s EU exit is signed, sealed and delivered. The UK is still party to EU Notified State Aid regulations. These regulations limit the generosity of the SME R&D tax credit while RDEC, on the other hand, isn’t. Hopefully Budget 2021 will bring good news on this front.  

R&D to drive innovation 

There were a few more R&D tax credit announcements nestled in the 125-page red book.  

Software R&D to expand

The government announced it will consult on “whether expenditure on data and cloud computing should qualify for R&D tax credits”. This doesn’t amount to an attempt to change the definition of software R&D.

Instead, it would be an expansion of the existing cost categories to include expenditure on data and cloud computing costs. It’s a smaller change than it sounds in practice, but it’s a welcome update that makes the cost categories more reflective of modern commerce. 

Externally provided workers (EPWs)

One further change not mentioned in the Budget document relates to legislation on workers provided through intermediaries, commonly referred to as IR35. These changes could prevent some expenditure which businesses currently include in their R&D tax credit claim for EPWs from qualifying. 

From 6 April 2020, there will be changes to the EPWs rules to ensure that businesses can continue to claim the same amount of relief for expenditure on research and development.  

PAYE/NIC cap delayed until 2021 

The introduction of the PAYE/NIC cap on payable credit in the SME R&D tax incentive has been delayed. The cap – which limits the credit that a loss-making business can receive to three times the company’s total PAYE and NICs liability for that year – was due to be introduced this year. 

It has now been officially delayed until 1 April 2021. This is a welcome relief because the government need to consider the implementation of this cap carefully.  While it’s vital that abuse of SME R&D tax credit is stopped, any cap will affect businesses that, for genuine reasons, have low or no PAYE/NIC liabilities, like start-ups. 

Overall, a positive speech for businesses and R&D 

Rishi Sunak – Sajid Javid’s understudy until a few weeks ago – has delivered a speech that was overall positive for UK R&D, albeit constrained by the ongoing coronavirus crisis. 

It was never going to be a blockbuster budget. Rightly so: the COVID-19 outbreak is a crisis and the Chancellor needed to act in swift support of the UK’s public services. But there were enough promising signs that R&D (and at the same time R&D tax credits) will form a prestigious part of this government’s economic agenda moving forward. 

At some point soon, this pandemic will subside. We hope simply that the government will push through on its commitments to R&D, while carefully reviewing the PAYE/NIC cap and ensuring the incentives fairly reward large businesses and SMEs. 

The history of R&D tax credits in the UK

If you want to understand Budget 2020 in the context of R&D tax credits’ illustrious history, check out our full timeline of the incentives.