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Out-Law News 2 min. read

UK Spring Statement: R&D tax announcements ‘hugely reassuring’

The latest announcements on exemptions to new territoriality restrictions on the availability of research and development (R&D) tax reliefs in the UK will be hugely reassuring to innovative businesses, particularly those in the life sciences sector, a tax expert has said.

Penny Simmons of Pinsent Masons, the law firm behind Out-Law, was commenting after the UK chancellor delivered his spring fiscal statement to parliament, in which he confirmed that expenditure on overseas R&D activities will still quality for relief in certain circumstances.

Documents published alongside the statement confirm that an exemption will be introduced for overseas R&D where there are “material factors such as geography, environment, population or other conditions that are not present in the UK” and that are required for the R&D activity to be undertaken. Overseas expenditure will also remain eligible for relief where there are regulatory or other legal requirements that activities must take place outside the UK. The exemptions will be introduced from April 2023, alongside new rules limiting most relief to UK-based R&D.

Simmons said: “For many UK businesses, undertaking R&D outside the UK is critical to creating and driving forward UK innovations. It is a huge relief that the government has listened to businesses and stakeholders and is making a U-turn on its previous plans to completely block tax relief for offshore R&D”.

Simmons Penny

Penny Simmons

Legal Director

For many UK businesses, undertaking R&D outside the UK is critical to creating and driving forward UK innovations

Changes to the R&D tax relief rules to ensure that they are targeted and “refocused” toward R&D undertaken in the UK were first announced in the UK Budget last autumn. In a December 2021 report into R&D tax reliefs, the UK Treasury confirmed that limited exemptions to the new territoriality restrictions would be introduced.

“There had been widespread concern across the life sciences sector that the new restrictions could have posed a potentially insurmountable stumbling block to the development of R&D,” Simmons said. “Vital elements of UK life sciences R&D are often undertaken outside the UK and can be essential to the innovation. For example, to gain licensing approvals for new drugs or vaccines, clinical trials may need to be undertaken outside the UK.”

She added: “As always, it is difficult to assess how wide the exemptions will be until the detailed rules are drafted. It is hoped that businesses will be given an opportunity to comment on the draft legislation before it is finalised”.

Currently, there is no requirement that the R&D activity must be undertaken in the UK for companies to be eligible for R&D tax relief. UK companies that incur R&D overseas may still be eligible for full tax relief. However, the government has said it wants to ensure that the reliefs incentivise UK innovation and are appropriately targeted in a way that best benefits UK industry.

The government also confirmed that the definition of R&D costs that are eligible for relief will be expanded to cover pure mathematics. This follows the extension of the definition to include cloud computing and data costs announced in the autumn Budget. The chancellor has now confirmed that all cloud computing costs associated with R&D, including storage, will qualify for relief from April 2023.

The government opened a review into the R&D tax relief system in spring 2021. Details of the wide-ranging review were contained in a consultation paper that was published in March 2021. The review remains ongoing.

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