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The UK Research and Development (R&D) incentives regime has matured significantly over the past 20 years, and innovation within financial services has catapulted the UK into becoming one of the global leaders in fintech innovation. As the UK positions itself to cement its position as the leading fintech innovation hub across the globe, the industry welcomes a timely review of the R&D regime with the latest consultation published by HM Treasury (HMT) and HMRC on 3 March 2021.
We have summarised the 17 questions asked in the consultation into four key themes below and have outlined our considerations from an industry perspective.
1. The UK definition of R&D for tax purposes
The recent review around the inclusion of data costs and cloud computing costs has been a welcome addition, but now the consultation goes one step further to seek feedback on the definition of R&D activities which have remained unchanged since 2004. The consultation document (?condoc?) cites many other jurisdictions that use a broader definition of R&D.
Common activities in financial services, such as financial modelling and advanced algorithmic development which often achieve mathematical advances, currently do not qualify as R&D under the UK regime in their own right. Are we missing out on significant positive output from these advances encouraging even greater investment in innovation?
2. Overseas expenditure
The ability to include costs on R&D activity performed overseas in the form of externally provided workers is one of the more generous features of the regime and makes the UK R&D regime one of the most competitive regimes globally. The ?condoc? seeks to understand the rationale for R&D activities being carried out overseas versus domestically.
In a post-Covid-19 world the financial services industry is evolving into a global collaboration unit working beyond borders and connecting its workforce remotely across the globe. As a result, the industry is now able to better access a global talent pool which doesn't always exist in the UK. We anticipate this global talent pool continuing to play a pivotal role in driving innovation that benefits the UK economy by generating intellectual property that resides in the UK and creating revenues and profits in the UK increasing UK tax revenues. Would restricting this feature of the R&D regime disincentivise innovation?
3. Sector/Regional differing rates of relief
The government is exploring the idea of differing R&D incentive rates by sector and/or region, to incentivise or disincentivise claims for certain sectors and locations. Does this further complicate an already intricate regime and defeat the positive direction of simplifying the regime?
The financial services industry contributed £132 billion to the UK economy in 2018 and makes up 6.9 per cent of total economic output - a leading innovation sector that we need to incentivise to continue innovating and investing in the UK. The technology developed by the industry supports the economic activity of a wide range of industry sectors from green energy to manufacturing. How feasible is a sector-based regime when the R&D activity is arguably cross-sectoral?
R&D activity is undertaken by the financial services industry throughout the UK. However there is on occasion a disconnect between the registered head office and the location where the R&D activity is undertaken. Given the rise in flexible remote working and the continuing trend for high-skilled job creation outside of London, business should make their views known on the desirability or otherwise of a regional split to the regime.
4. Role of HMRC, agents and the removal of R&D from the corporation tax self-assessment (CTSA)
An interesting question in the consultation relates to the role of HMRC and whether the regime should be administered outside of the corporation tax (CT) return. This would remove R&D incentives from the CTSA regime and see an alternative means of administration that could require more information being provided at the start of the claim process for advance assurance or approval.
There has been a mix of views on this issue. Some businesses take the view that HMRC remains well placed to administer the regime via the CT return, with other businesses taking the view that removing the regime from the CT return and setting up a dedicated administrative system may lead to faster repayments which are vital for cash-strapped industries.
The UK government has set out a broad set of questions and needs to consider taking a balanced approach when considering the future of the UK R&D incentives regime. The consultation makes clear the twin aims of HMT are to ensure the R&D regime remains globally competitive while ensuring value for money for taxpayers.
Read more: Wide-reaching consultation launched on the future - KPMG United Kingdom (home.kpmg)
Sandra Gilchrist, Partner, R&D Incentives, KPMG