The government has announced three measures in respect of research and development (R&D) tax relief. First, the rate of Research & Development Expenditure Credit (RDEC) will increase from 12% to 13% for expenditure incurred on or after 1 April 2020. Second, there will be a consultation on whether data and cloud computing costs should qualify for R&D tax credits. Third, the introduction of a PAYE cap on the payable tax credit for Small and Medium Sized Enterprises (SMEs) will be delayed until 1 April 2021, pending further consultation on the design of the cap.
In addition, the legislation bringing in changes to the off-payroll working rules (IR35) will include consequential amendments to the externally provided workers (EPW) provisions to ensure that companies claiming R&D tax relief can continue to claim the same amount of relief for expenditure on research and development.
Companies that carry out R&D and claim RDEC. The proposed inclusion of data and cloud computing costs will be of benefit to companies incurring such costs when undertaking R&D activities, regardless of whether they are claiming under the SME or RDEC regime.
The introduction of the proposed PAYE cap on the payable tax credit is intended to reduce abuse of the R&D tax credits scheme for SMEs, but it is noted that this may impact companies that use significant third party staff and/or subcontracted resources to support their R&D activities.
We understand that the consequential amendments to the R&D legislation to be included in the IR35 rules are intended to enable companies incurring expenditure on EPWs to continue to be able to claim relief for that expenditure.
The rate of RDEC will increase from 12% to 13% for expenditure incurred on or after 1 April 2020. The introduction of the PAYE cap on the payable tax credit for the SME R&D scheme is now expected to come into effect on 1 April 2021. We await further details on the consultation on whether data and cloud computing costs should qualify for R&D tax relief.
Companies undertaking R&D will likely see an increase in the value of their claims, which will be welcome.
We recognise that the government has listened to the views of R&D claimants in looking to extend and modernise the relief to include data and cloud computing costs as qualifying expenditure.
We are supportive of the government’s intention to reduce abuse of the SME relief, whilst seeking to ensure it does not adversely affect legitimate claims.
We are pleased to see that the government is also addressing the potential impact that changes to the IR35 rules would otherwise have on the value of companies R&D claims.