Guest blog by Carrie Rutland, Partner at BSA Associate, BDO
Tax incentives don’t drive business innovation, but they do offer significant help in financing it - so it is always important to keep up with developments in the tax reliefs and allowances available in the UK so you can cost your future R&D projects accurately.
R&D relief changes from 2023
Following a wide-ranging consultation on the current R&D tax reliefs last summer, at the Autumn Budget the government announced changes to R&D tax reliefs that will take place from April 2023.
While further reform to UK R&D tax relief is still expected in coming years, the most recent proposals will have a significant impact on the project costs of building societies from 2023. On the positive side, the costs of buying and using data sets for R&D and fees paid to use various cloud computing services will qualify for UK R&D relief after April 2023. The precise details of which cloud computing services will qualify, how they must be apportioned and how data sets are “consumed” are just some of the aspects that still need to be established through ongoing consultation: but the principle that these costs can qualify is welcome.
Far less welcome is the action that the government is proposing to restrict R&D relief to projects where the R&D work is carried out in the UK. This is proposed because government statistics show that while Companies claimed UK tax relief on £48bn of R&D spending, UK ‘business investment’ was around half of that, at just £26bn. While this change will bring the UK R&D regime in line with most R&D regimes worldwide by focusing purely on domestic expenditure, it will affect the cost base of many businesses carrying out R&D through IT projects outsourced overseas: building societies and other financial services businesses are bound to be affected.
While it appears likely the restriction on overseas costs will not be absolute, the range of exceptions to the new rule will be small and unlikely to have significant application to the usual R&D work outsourced overseas by building societies (ie software development). So the key question now is: Where are your developers and programmers based? If they are offshore, will it be more cost-effective to bring the work back to the UK and claim R&D tax relief, or will it still be cheaper to outsource the work overseas anyway regardless?
Time to reconsider Patent Box claims?
With the R&D relief proposals threatening to increase IT development costs, it is important to make sure that you don’t miss out on other UK tax incentives that can help to finance innovation in your business. The Patent Box is one such relief and, while it is sometimes seen as complex to claim, I believe it will become increasingly important to businesses in future years – if only because the 10% effective tax rate it offers on qualifying profits will look even more attractive when the main corporation tax rate becomes 25% from April 2023.
How is a patent likely to be relevant to a building society? There are many instances where a new element of software enables a new or enhanced form of service and can be patented. You don’t need to patent an entire product/technology platform to qualify for patent box – in fact it’s easier, and just as beneficial, to patent something small but key to your platform. This means you don’t have to give away any key trade secrets when applying for a patent (even though the patent details will be in the public domain).
For example, if you were to patent a small but intrinsic part of, say, your user authentication code within a mobile app then, if structured correctly, it may be possible to get the reduced rate of Corporation Tax on all the profits attributable to the use of that mobile app. And the really good news is that you don’t have to wait until the patent is granted - the 10% effective rate applies from the date of the patent application.
Of course, patent box claims are now very much linked to R&D work: the R&D nexus fraction must be applied when calculating your claim. Broadly, the more that the patent arises from the R&D work you have carried out, the bigger the fraction of qualifying profits you can claim. For now, that R&D need not have been carried out in the UK, if fact, R&D attributable to the patent can be conducted by another group company as long as it’s directed from the UK.
UK tax incentives will always evolve as the government searches for more efficient ways to grow the economy. The next step in this evolution will bring Patent Box into sharper focus, so it’s probably worth reviewing your current or recent projects to see if you could benefit.
BDO has one of the leading Innovation Incentives Groups in the UK, and Carrie Rutland (email@example.com) the Partner leading the FS sector, would be delighted to discuss with you how you can make the most of the Government backed incentives in your business.
The views, opinions and positions expressed within guest blogs are those of the authors and do not necessarily represent those of the BSA.