Tax changes ‘threaten tech exodus’

David Byrne of ForrestBrown

Half of UK’s science and technology businesses expect to move some of their R&D activity abroad as a result of upcoming changes to tax incentives.

UK companies pursuing scientific and technological innovation can currently benefit from R&D tax relief while supervising overseas resources. This helps to make the UK a more attractive location from which to lead complex global R&D programmes, enabling companies conducting cutting-edge development to utilise specialist technical expertise that may be scarce in the UK.

Legislation due to come into force in April seeks to refocus R&D tax incentives towards innovation carried out in the UK by excluding relief for subcontracted work and the cost of externally provided workers (EPWs) when R&D is carried out overseas, according to R&D tax relief consultancy ForrestBrown.

They say this change risks derailing the UK’s attempts to establish itself as a science and technology superpower. On average, science and technology businesses surveyed by ForrestBrown invest nearly £1.1m in R&D activity per year.

The Office for National Statistics estimate that expenditure on R&D performed by UK businesses in 2021 was £46.9bn. But this research implies this figure could be severely diminished as a result of the impending legislation.

It also shows that the main motivation for businesses relocating R&D activity abroad is a shortage of the specialist skills they need in the UK. This is particularly true for the science and technology sector, where 42 per cent stated that the availability of talent was the primary factor when considering where to locate. It is this talent squeeze which often necessitates looking overseas for the specialist skills required.

Against this backdrop the proposed changes to the relief, while intended to attract more R&D investment to the UK, could instead encourage businesses to look for more favourable policy environments from which to run global R&D activity, with greater flexibility to access the talent they need.

ForrestBrown Director, David Byrne said: “R&D tax incentives are a key factor in decision-making for multi-national companies when determining where the locus for projects should be.

“Putting the UK at the centre of global collaboration has clear spillover benefits for the knowledge economy – even when some activities are carried out overseas because of a scarcity of specialist skills in the short-term. Our research indicates that restricting R&D tax relief in this way could ultimately harm the UK’s ambition to become a science and technology superpower.”