One thing that was clear from Rishi Sunak’s Spring Statement was that, in return for the far-reaching and unprecedented support he gave them throughout the Covid-19 pandemic, he wants businesses and the private sector to lead the charge in the country’s economic recovery.
Prior to the Statement, the Chancellor used his Mais lecture in February to talk about the role of government in encouraging the private sector to create a “new culture of enterprise” that will, he hopes, underpin the future economy. He also reiterated the pledge to increase public investment in R&D to £22 billion per year by 2026/27.
This public spending, however, is only half the story. While total UK fiscal support for R&D, currently at 0.9% of GDP, is in line with the OECD average and set to move into the top quartile over this Parliament, self-financed business R&D as a percentage of GDP is less than half the OECD average. By 2019, business spending on R&D was 10 – 15% lower than before R&D tax credits were introduced, so that R&D spending amounts to just four times the value of the R&D tax relief. The OECD average is 15 times.
So, why aren’t R&D tax credits doing enough to boost growth? According to the Chancellor, “businesses simply aren’t investing enough.” And, to that end, the Chancellor has signalled more extensive reform to the tax system in a bid to encourage greater private-sector investment in R&D.
The Autumn Budget in 2021 introduced territorial restrictions designed to ensure that tax relief is refocused towards R&D investment and innovation undertaken in the UK. It also expanded the definition of qualifying expenditure to include a range of data and cloud computing costs.
The Spring Statement went further, confirming that all cloud computing costs associated with R&D, including storage, will now qualify for relief. It also expanded the definition to clarify pure mathematics as a qualifying cost, which will be attractive to sectors such as artificial intelligence, quantum computing and robotics. Responding to industry objections about the impact of territorial restrictions on sectors like the life sciences, the government eased them slightly to recognise that in some cases it is necessary for R&D to take place overseas, such as where there is a material requirement (e.g. deep ocean research) or a regulatory requirement (e.g. clinical trials).
Importantly, the government has referred to these as its “initial reforms” and will consider further steps to ensure that the R&D tax regime is both boosting growth and delivering value for money. To target R&D tax relief effectively, the government has suggested that it will consider increasing the generosity of the RDEC scheme. This would, it says, rebalance the schemes and make RDEC more internationally competitive. In addition to this, it has said it will look at what more can be done to tackle abuse of R&D tax credits, particularly in the SME scheme. The Chancellor maintains that the review into R&D tax credits is ongoing and further announcements will be made at the Autumn Budget in 2022.
Investors with an interest in assets involved in data-heavy research that will benefit from the inclusion of cloud computing and storage, or in nascent sectors – such as AI, quantum computing and robotics – that will benefit from the inclusion of pure mathematics, will be pleased with the announcements in the Spring Statement. But investors looking at assets with research functions more widely will want to monitor the considerable changes that are likely in the not-too-distant future. The Chancellor will be open to suggestions from businesses that can demonstrate their commitment to investing in R&D as the details of the new policy are worked out, so there are likely to be opportunities for businesses to contribute to the government’s thinking as it seeks to set a course for the country’s economic growth.
To discuss the government’s current approach to R&D tax credits, please email Thea Southwell Reeves on firstname.lastname@example.org.