Budget 2021: How will R&D tax relief be affected?
Author: Scott Burkinshaw
The key message to come out of the latest Budget was that R&D remains an important part of the UK’s recovery plan, with the Government keen to increase investment into R&D to 2.4% of GDP by 2027. This is good news for companies looking to take advantage of R&D tax relief schemes.
Will the new Budget impact R&D tax relief claimants?
Whilst there was little of immediate impact for current R&D tax relief claimants in last week’s Budget, there are several points to note which will have an effect in future years, including the Government indicating its commitment to continued support for R&D tax relief through an in-depth consultation on the scheme’s current operation. Here we summarise some of the main points of interest for innovative companies.
Consultation on the future of R&D tax relief
As part of the aim to increase investment in R&D, the Government announced a review of R&D tax relief to ensure it helps the UK to be a competitive location to carry out R&D and that the relief is fit for purpose.
The review will cover the definition of R&D, eligibility and scope of the relief (for example, extending the relief to the social science sector) and also potential operational improvements.
A previous consultation on extending qualifying costs to include data and cloud computing has been rolled into this consultation, which is also looking at whether there should be additional relief for capital costs.
One point to note is that the consultation highlights the fact that the existing SME relief is different in the context of other international schemes, operating as an additional deduction rather than credit.
Announcements that will have an immediate impact
We have previously covered in some detail changes in the legislation to limit the R&D credit which can be claimed by certain companies. As part of an attempt by HMRC to reduce abuse of the scheme, this does have the potential to impact genuine claimants.
Essentially, here the payable R&D credit is restricted to £20k plus 300% of the company’s PAYE and NI costs.
One change of immediate effect was announced in the Budget last week with the start date for this new legislation being delayed until accounting periods beginning on or after 1 April 2021 (previously the change applied to all companies from 1 April 2021). If you claim, or expect to claim, an R&D credit in excess of £20k we would recommend you contact your R&D advisor to understand if this new rule will impact you.
LOSS CARRY BACK RULES
Not directly an R&D measure, the change to the loss carry back rules may have an impact on how certain claimant companies can best access the relief. Broadly speaking, for accounting periods ending between 1 April 2020 and 31 March 2022, taxable trading losses will be able to be carried back for three years rather than the usual 12 months.
Companies who have either cashed in losses for a payable credit at 14.5%, or are carrying forward losses for future relief, could review whether this change now enables them to utilise losses against prior years’ liabilities for a repayment at 19%.
Again, not specifically related to R&D but of interest to companies investing in R&D facilities in the UK, an enhanced first year capital allowance will apply for expenditure between 1 April 2021 and 31 March 2023.
Qualifying plant and machinery will be eligible for a super-deduction of 130% which can be combined with the existing 100% Research and Development allowances (RDAs) on all capital expenditure relating to R&D facilities (excluding land).
How will corporation tax increases impact R&D claims?
Whilst there were no changes to the rates of R&D relief themselves, the proposed increase in the main rate of corporation tax to 25% from 1 April 2023 will impact on the value of future R&D claims.
Briefly, companies with profits under £50k will be subject to tax at 19%, companies with profits over £250k will be taxed at 25% and there will be a marginal rate calculation for profits in between these two parameters.
As the SME R&D relief is an additional deduction against taxable profits of 130% of qualifying costs, a company with taxable profits over £250k could see the value of its SME R&D claim increase from 24.7% to 32.5%. However, there may be an adverse effect for claimants of the RDEC scheme, which is a taxable notional credit as the increased CT rate will reduce the benefit of an RDEC claim from 10.53% to 9.75%.
It is worth noting that should the corporation tax rate increase then the value of the Patent Box relief will also increase. This is because the current Patent Box rules tax patented profits at 10% and therefore the saving for companies paying tax at the main rate of 25% becomes 15% rather than the current 9%. This additional value may encourage more companies to review their Patent Box eligibility.
More information on Chamber R&D can be found here – https://www.brchamber.co.uk/discounted-services/chamber-rd/