In his 2022 Spring Statement, chancellor of the exchequer Rishi Sunak has expanded the government’s research and development (R&D) tax relief scheme in a bid to improve innovation and productivity in the UK.
Sunak announced that, from April 2023, all cloud computing costs associated with R&D, including storage, will now qualify for tax relief.
The move is the latest step in a reform plan announced in the October 2021 Budget. According to HM Treasury figures, UK companies claimed tax relief on £47.5bn of R&D expenditure in 2019 – although the Office for National Statistics estimates that UK businesses only carried out £25.9bn of privately financed R&D.
“This will allow companies to claim for costs related to the storage of vital data, supporting data-heavy research such as genomic sequencing,” said HM Treasury documentation released alongside the Spring Statement.
The definition of R&D for tax reliefs will also be expanded to include pure mathematics as a qualifying cost.
“This reform will support nascent sectors where the UK has a comparative advantage, such as artificial intelligence, quantum computing and robotics, while also supporting strong sectors such as manufacturing and design,” said the Treasury documentation.
Sunak said UK business R&D investment is less than half of the OECD average as a percentage of GDP. The new reliefs aim to “deliver better value for money for the taxpayer while being more generous where they can make the most difference”, said a Treasury statement.
The R&D tax reforms follow other measures previously introduced by the government to support innovation and investment in technology.
In the March 2021 Budget, Sunak launched a programme called Help to Grow: Digital to support 100,000 SMEs to become more productive and profitable by adopting productivity-enhancing software, offering a 50% discount in the cost of such tools, worth up to £5,000.
The first phase of the Help to Grow scheme kicked off in July 2021, targeting suppliers within the e-commerce, accountancy and customer relationship management software markets to sign up as approved providers.
In the Spring Statement, Sunak also announced a new Cabinet committee on efficiency and value for money, which he will chair, to cut £5.5bn worth of cross-Whitehall waste – an initiative likely to include digital projects. Any savings will be used to fund public services, he said.
The tax relief measures are aimed primarily at helping SMEs to grow. However, Paul Christensen, CEO at Previse, a fintech provider likely to be the sort of company Sunak hopes to benefit, said the government needs to introduce measures more relevant to the challenges faced by firms such as his.
“Simply saying that the UK is a global technology hub doesn’t make it one,” said Christensen.
“The low uptake of blanket measures such as Help to Grow: Digital suggests that the government’s ‘one-size-fits-all’ approach to recovery loans will not be enough to drive economic growth. Traditional finance for SMEs is clunky, difficult to obtain and expensive when it can be accessed.
“Using technology to modernise B2B commerce and provide firms with flexible and embedded financing could go a long way in ensuring that SMEs aren’t left behind as the economy seeks to level up.”
Technology trade body TechUK welcomed the R&D reforms, but agreed that more needs to be done.
“The proposals unveiled today to further expand R&D tax credits and consult on ways to maintain the tax deduction for capital expenditure have the potential to unlock more investment into UK innovation,” said TechUK CEO Julian David.
“However, to get this right the government must ensure that the software and intangible assets that power modern business investment are kept in scope. Otherwise, the government risks missing an opportunity to unleash the potential of tech led growth.”
Concerns were also expressed from a source closer to home for the chancellor.
Andrew Duncan, UK CEO at Infosys Consulting, the global consulting arm of Indian tech giant Infosys, welcomed the addition of cloud and storage for tax relief, but said the UK innovation and productivity gap needs filling quickly.
Sunak’s father-in-law, NR Narayana Murthy, is emeritus chairman and co-founder of Infosys.
“R&D tax relief and government support for innovation wasn’t focused on as much as I had hoped, with the government holding back on confirming much of their support in this area until autumn,” said Duncan.
“Supporting the UK’s digital re-skilling agenda is of the utmost priority – particularly as business leaders are battling for top talent during this challenging environment. The government’s Help to Grow programmes are positive steps in this direction, but there is still some way to go to make real change by involving big businesses.”