93% of North West businesses set to be impacted by R&D tax reform

• 93% of North West companies will be impacted by Government announcement to eliminate reliefs for overseas R&D, which will come into effect from 1 April 2023
• Currently,17% of mid-sized North West companies carry out more than half of their R&D internationally
• Another 43% of businesses do more than a third of their R&D overseas
• Only 7% of North West businesses say they won’t be impacted at all because they don’t claim R&D, or they do it in the UK.

Ninety-three per cent of North West 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 North West 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.

Vince Walker, BDO’s Lead for R&D Tax services in the North of England, said: “The impending change to onshore R&D is a prudent move, as the Government makes strides to enhance UK innovation and better police genuine UK R&D. However, the new R&D tax relief rules will impact a significant number of North West businesses. It’s vital, therefore, that business leaders take advantage of the next 15 months to prepare and plan for landscape ahead.”

He added: “The 93% of North West 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’s Head of Tax in the North West, Angela Cross, 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 BDO’s most recent data showed 87% of North West businesses are already planning to increase their use of contractors to bridge the skills gap next year. Angela said skills shortages could also be a considerable barrier to onshoring effective R&D.

A Government consultation, which closed on 7th January 2022, sought 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.