Spring Statement: Changes to R&D Tax Incentives in the UK and how these may affect Tech companies

Outline of the Changes:

Under the proposals first announced in the Autumn Budget 2021, and re-iterated in the Spring Statement, it was revealed that the Government plans to restrict R&D Tax reliefs in respect of expenditure incurred outside the UK from April 2023. Subcontractor activities will need to take place in the UK, and Externally Provided Workers (i.e. Staff sourced via agencies) will need to be within the UK Tax Regime (i.e. they make PAYE and NIC contributions). The objective is to refocus the reliefs towards innovation in the UK and ensure more of the benefit goes towards stimulating the UK economy, however these changes may give rise to unintentional consequences, particularly for modern global industries relying on distributed teams such as in the Tech sector.

Exceptions to the Rule:

The Spring Statement offered some clarification that international R&D costs will be allowable in certain situations where there are ‘material’ (i.e. geography, environment or population factors), or regulatory / legal factors which make it necessary for the work to take place overseas. Despite this clarification, it is still unclear where the line is drawn, and uncertainty remains regarding HMRC’s position for are a number of common scenarios.  Scale and Flexibility

Whilst the UK is home to many highly skilled technical professionals, such as software developers, there are various instances where hiring from the UK is prohibitively challenging. This is particularly the case in an industry where remote working was common long before COVID and the workforce is truly global. Whilst it would be possible to hire developers in the UK, in periods of rapid expansion, it is far more practical to hire a fully prepared team. For example, established development houses in Poland, India, or Argentina have capability to begin work immediately, rather than attempting to spend months in the UK pulling a team together, whilst competitors focus on improving their product.

Specialisms

There are situations where a specific skillset is common in a particular region. For example, for matters of advance Cybersecurity, Israel is world renowned. Whilst it may be possible to get the expertise in the UK, it would be far easier and less time consuming to hire from an ecosystem where the knowledge is most prevalent. Should a UK company be punished for sourcing a workforce abroad whilst continuing to operate and hold their IP in the UK?

Long Term Integrated Teams

In many situations, teams across borders have been working closely and seamlessly for a number of years and work as one given their comprehensive and specialist knowledge of company systems. This knowledge is not easily transferrable or replicable due to the complexity and uniqueness of the systems, and the existing team is integral to system developments. The question arises on whether continued operations in this manner be deemed a reasonable exemption, or would the company be expected to replace this workforce with a new UK team and training them on the systems before they are eligible for R&D Tax Reliefs? The R&D Team at MacIntyre Hudson have posed these questions to the R&D Consultive Committee run by HMRC, as part of the consultation on these changes.

Company Takeovers

It is common within the Tech sector that a company is purchased due to their expertise, and the existing IP, however under the mooted changes future costs would no longer be allowable for relief. Should the government be punishing UK companies for attempting to expand and ensuring that the IP and the benefits from that IP continue to be realised in the UK?

Ultimately, the treasury wants to ensure that decisions aren’t made purely on a cost basis. Whilst we agree situations where companies outsource work solely due to cost and cheaper labour abroad should be curtailed, this blanket approach seems to harm the same types of high-tech companies that the government has made so much overt public noise of supporting. There is a possibility that companies decide it is more viable to move abroad rather than continue to operate in the UK, taking their IP and profits with them.

Preparing For the Changes

Although the changes may yet be relaxed, it is not too early to begin planning for potential changes.

Whilst moving staff to the UK would be most beneficial from a Tax Relief perspective, there are many factors which could impact decisions. A cost-benefit analysis of moving a portion of staff could be beneficial, particularly those leading the R&D efforts as it may become important to show that the work is ‘managed and controlled’ in the UK. In addition, it may be worth investigating alternative contractors based in the UK who may be able to replace companies based abroad, and to begin building a relationship with other teams.

Companies in the start-up phase often have very low staff costs and tend to be more reliant on outsourced labour (be it in the UK or abroad). These companies have already been impacted by the cash credit restriction based on PAYE and NIC contributions which has been in place since April 2021. These companies in particular may be more incentivised to consider hiring staff to begin unlocking this cash benefit.

From a compliance perspective, we recommend ensuring records are kept of who is based in the UK and who is based abroad, particularly for larger companies with more complex claims.

Although considering changes at this stage is useful, it is still too early to make concrete changes. We expect draft legislation to be published in Summer 2022, at which point plans can be made with greater certainty.

For further guidance on this topic, please contact our specialist team.

Read the latest tax commentary - visit our dedicated Spring 2022 Forecast Statement Hub.

We will be providing resources, advice and practical guidance from our experts to help you prepare and manage the impact of upcoming tax changes.