Tax Tuesday is thinking again about Research & Development tax relief, this morning.
There are a couple of important things to report on.
Recap of the SME R&D scheme
By way of a recap for all, the SME scheme provides that eligible R&D costs borne by companies are increased to 230% of their commercial cost, for the purposes of Corporation Tax relief.
This means that the effective rate of tax relief increases from the 19% nominal rate of CT to nearly 44%. By the way, after the CT hike, which is planned for April 2023, and assuming the R&D enhancement rules remain unchanged, the rate of relief will increase from the anticipated new nominal CT rate of 25% to an effective rate of relief on R&D of 57.5%.
This R&D enhanced relief also means that there is a valuable source of cash refund for those companies who make tax losses after an R&D enhanced deduction, and who decide to “surrender” those losses for a repayable credit (at a rate of 14.5% of the R&D loss). This refund can amount to 33% of the commercial cost of the R&D expenditure undertaken.
The overall scheme is said to have cost the exchequer just over £5 billion in 2017/18. (We must presume that government does not yet have more recent statistics, although we can reasonably expect the annual cost to have continued to rise).
A capping of the repayable credit from 1 April 2021
Companies likely to make tax losses in accounting periods beginning on or after 1 April this year and who wish to surrender their R&D losses for a repayable credit, need now to be aware that this cash refund will be subject to a cap.
That cap will amount to £20,000 plus 300% of the company’s total PAYE and National Insurance liabilities for the year in question.
This measure has been introduced, the government tells us, in response to fraud and abuse which has grown significantly in relation to repayable credit claims, in particular.
There are some companies which will be exempted from this cap, i.e., those whose employees are “creating or preparing to create intellectual property or managing intellectual property, and where less than 15% of their qualifying R&D expenditure is spent with connected persons”.
Potential loss-makers undertaking cashflow forecasting will want to predict their total PAYE and NI liabilities before factoring in potential receipts of any R&D repayable credit claims. In any event, the increasing nominal rate of CT (to 25% from April 2023) is likely to focus the minds of loss-making company directors, as to whether use against future tax liabilities might now be preferable anyway…
The future of R&D
A reader might be forgiven for thinking that, given the size of the cost to the public purse (as noted above), the extent of fraud and abuse now routinely taking place, we understand, (again, as noted above), and in view of the pandemic-driven deficit, the future of R&D as a source of generous tax relief for companies might be under some threat.
This, Tax Tuesday is pleased to report, looks unlikely to be the case, with the publication of a new R&D consultation this month, which includes a re-assertion of the government’s commitment to its Industrial Strategy and their target 2.4% of GDP to be spent annually on R&D by 2027.
The consultation process points towards a potential overhaul of the system but seemingly one which might extend the definition of eligible costs, improve the access of companies to the relief, and address some of the current frustrations among taxpayers (including, for example the exclusion of capital expenditure from enhanced relief).
During his Budget Speech on March 3, The Chancellor referred to the government’s wish and intention to make the UK R&D scheme “internationally competitive”.
We must be encouraged to anticipate more, not less, scope for tax opportunity from activities where innovation and other technological advances are sought by our clients.
How can we help?
If you are not currently claiming R&D tax relief but think that you might potentially be eligible, or you want to be reassured that future plans might qualify, please do get in touch to discuss this, either with your relationship principal or with Chris Barrington, Tax Partner.