Spring Budget 2017 Innovation Update

Consequence of the announcements in the Spring 2017 Budget

About Innovation - March 2017

F. Initiatives discusses how the announcements in the Spring 2017 Budget will affect companies claiming for innovation incentives, including through the R&D Tax Regime.

The first spring budget under Philip Hammond MP, Chancellor of the Exchequer for Theresa May’s Conservative government, was announced on 8th March 2017. With the triggering of Article 50 and the upcoming Brexit negotiations, it was always very likely that this budget would focus on making the UK an attractive place to do business. As such, we expected good news for innovation, with discussions around R&D tax, and further announcements on grant funding. We were, however, disappointed that no changes were made to the structure of the R&D Tax regime.

During 2016’s Autumn Statement, we were told that the government would be conducting a review into the Research and Development Expenditure Credit (“RDEC”), with results expected in this year’s budget. The review concluded that the current regime is considered to be internationally competitive, however concerns have been raised by industry on the certainty around how the rules of R&D tax relief apply to claims by large businesses. The government will, therefore, be looking to improve on the administration of the regime, in addition to continuing their work in raising awareness amongst SMEs. At present it remains unclear as to how the administrative burden can be reduced for large companies, particularly considering the UK’s scheme is already strong on this front in comparison to other international R&D incentives.

Despite there being no major changes for the R&D tax landscape in the UK, there were a number of other factors that may indirectly affect companies claiming for R&D tax relief. These include a significant increase to Class 4 NICs for the self-employed, in addition to a reduction in the tax-free allowance for directors receiving dividends. This reform has been specifically designed by Hammond to reduce the unfairness in the current system whereby workers who are paid through their own limited companies pay significantly less tax. This may translate into more workers being employed directly by the businesses they work for, therefore resulting in an increase in R&D expenditure claimable as staffing costs which, unlike Externally Provided Workers (“EPW”), are not capped at 65% under the current R&D Tax regime.

There is also good news for the innovation grant landscape in the UK. With much of the innovation grant funding currently coming from EU administered grants, it has become increasingly difficult for UK companies to access this funding. Therefore, the government needed to do ensure the UK does not fall behind the competition in this area. It was previously announced by Philip Hammond that companies currently receiving grant funding (through programs such as Horizon 2020) would be protected. However, this would only help those already in receipt of funding. Therefore, the extension in funding disruptive and high-tech industries by the UK government was always likely to be well received. As such, Hammond has announced £270m in funding for high-tech areas such as biotech, robotics and driverless vehicles.

We welcome the focus on innovation, and believe the renewed emphasis on developing the key skills required in the workplace for both technical and STEM disciplines is a step in the right direction. In addition to this, we will be eagerly awaiting news as to how the existing R&D tax regime for large businesses (RDEC) can be made administratively simpler, and whether this has any notable implications for uptake of the regime.

R&D Tax Credits Advisors. R&D Tax Credits Experts.