R&D tax allowance: he giveth and he taketh away

Chris Sanger, EY’s Head of Tax Policy, comments on the extension of the R&D allowance:

“The message from the Chancellor demonstrated his economic credentials in his announcements of R&D tax allowances, in that he was two-handed. On the one hand, he provided the long-requested extension of the relief to include data and cloud computing costs. This modernisation of the R&D expenditure categories is long overdue and will be welcomed by many companies. Keeping the rules of the R&D regime current to reflect how businesses operate is vital to the continued success of the credit.   

“On the other hand, the Chancellor restricted relief for the cost of R&D carried out overseas but funded by the UK.  This penalises those multinationals that have headquartered their R&D in the UK, even when the UK forms only part of the R&D undertaken across the globe. This international element has been a long-established feature of the UK regimes, being particularly attractive to multinationals setting up R&D centres within the UK. Its removal will detract from the UK’s effort to increase R&D investment in the UK from the current level of 1.8% of GDP which is significantly lower than other advanced economies and below the OECD average of 2.5%.

“Further details will be released in late Autumn so companies will have to wait to see the details and what impact this will have. In particular, the definition of overseas activities could have an impact on whether key industries continue to see the UK as a great location in which to develop global centres of excellence and expertise.”