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Will UK R&D firms abandon ship?

Insights by administrator on 21st March 2023

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The law of unintended consequences can be a killer. New research by R&D consultancy company ForrestBrown shows that changes to the R&D tax credit scheme seem to have done the opposite of what was expected.

In their new research, ForrestBrown reports that 50% of firms questioned said that they expect to move their R&D research abroad in the next year and directly cite the changes to the R&D tax credits regime as the reason.

So what has changed?

In the 2022 budget, the then chancellor Rishi Sunak announced changes to the R&D legislation that would effectively bar overseas spending as a part of an R&D tax credits claim.

On the face of it, this seems like an entirely reasonable response to a need to both encourage UK R&D spending and ensure that home-grown businesses get the downstream benefits.

However, the devil as they say is in the detail and in what is becoming an all too common theme with this and previous administrations, the headlines were rushed out before the background foundations were laid.

What is now becoming clear is that the exemptions for overseas spending will be very narrow and will not help with the two problems that businesses face most often; a lack of overseas workers and higher UK costs involved.

In response, multinational firms are saying that they will move their research overseas, exactly the opposite action that the government wanted them to take!

Software development – a case study

A good example of a sector negatively affected by recent changes is the software sector.

The UK has an excellent track record in this area, especially with software that is used for the creative and pharmaceutical sectors but that could all be about to change.

In the past, UK firms would be free to recruit coders and designers from anywhere in Europe with no visa or residency requirements. Of course that all changed in January 2019. Similarly additional Right to Work requirements meant that it became more difficult, more costly and less likely to be able to recruit from overseas.

This naturally led to a reduction in the number of UK-based talent.

Software is a perfect example of a sector that spans across borders. It is not unusual to have people working on the same project in Silicon Valley, Manchester, Ukraine and Mumbai. Super-quick connectivity and communications have made that as easy as working with someone at the next desk.

The additional costs of working in the UK meant that it has been more attractive to use people from overseas for remote development work.

Under the new regulations that won’t be possible, so what is a company to do?

The unintended consequence is that companies will either move development abroad or not do any at all.

All is not lost

There are a couple of bits of good news though.

The first thing is that the new rules don’t come into force until April 2023, meaning that businesses still have time to get qualifying expenditures into their accounts.

Secondly, the government is currently running a consultation exercise regarding the final form of the R&D tax credit regime which should iron out many of the mistakes that they have made.

It is also important to remember that the vast majority of costs incurred for R&D by UK firms is spent in the UK itself and so they will still be eligible.

Watch this space

The government has promised long-overdue reforms to the R&D regime and it is to be hoped that they will take on board the views of users and advisors before drafting legislation.

With The Labour Party also making promising noises about business investment it is to be hoped that governments of all colours will put some forward-thinking rules in place for R&D spending.

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