Ninety percent of Midlands businesses set to be impacted by R&D tax reform – BDO

Ninety per cent of Midlands business leaders will need to rethink their tax and innovation strategy as the Government has confirmed new R&D tax relief rules, first announced in the Budget, according to new research from accountancy firm, BDO.

The bi-monthly Rethinking the Economy survey of 500 leaders of medium-sized businesses reveals the significant proportion of Midlands businesses that will be impacted by the announcement which aims to target abuse, improve compliance and drive UK innovation.

Experts warn that without forward planning and a holistic tax strategy, this could have substantial implications on business’ cashflow and moreover for innovation in UK businesses and particularly in the regions.

Ross Northall, partner at BDO LLP, said: “At a policy level, it makes sense that the Government are seeking to onshore R&D, enhance UK innovation and better police genuine UK R&D but, practically, business leaders need a plan.

The 90&D overa of Midlands businesses with overseas R&D will need to consider modelling the impact of these tax changes on their R&D claim.

"This will allow them to truly understand the net cost of innovation for future R&D now the detail has been announced. Of course, the greatest cost to UK Plc could be that businesses invest less in R&D overall as they’re not able to transfer the current level of investment into the UK.”

ONS figures estimate that approximately £25.9 billion of the £47.5 billion of R&D investment in 2019 was in the UK with the remainder spent overseas.

BDO tax director, Claire Hudson, added: “For business leaders, this isn’t a case of just re-looking at their approach to R&D. Companies need to take a strategic approach and consider the detail of these changes and whether a restructure is required.

"There are several corporate tax considerations, such as whether onshoring would result in a transfer of IP, whether transfer pricing is impacted, and any overseas entities need to be liquidated. The good news is there is time to get into the detail, but this needs to be a priority for leaders in the new year.”

Businesses have struggled with staff shortages over the past 12 months and our most recent data showed 77 per cent of Midlands businesses are already planning to increase their use of contractors to bridge the skills gap next year. Skills shortages could also be a considerable barrier to onshoring effective R&D.

BDO tax partner, Ben Tarry (pictured), who leads the Global Employer Services team, added: “The changes may also have an impact on staffing models within businesses, which could see a need for increased resource located in the UK.

"This could either be through permanent transfers, project workers or other. In each scenario there will be a need to consider the tax, social security and payroll compliance implications of cross-border employee movement.”

There is also a Government consultation – open until January 7, 2022 – seeking views on the introduction of a UK re-domiciliation regime, which would make it possible for companies to re-domicile and therefore easier to relocate to the UK.