Enhanced value of research and development for companies - Derek Gemmell
While setting out his continued ‘whatever it takes’ COVID-19 support for the UK, the Chancellor confirmed companies have received considerable support and will be the first to fund the recovery.
From April 2023 companies with profits in excess of £250,000 will have to manage an increase in Corporation Tax (CT) to 25 per cent per cent.
Companies with profits below £50,000 will remain taxed at 19 per cent with a taper graduating the effect on companies with profits between £50,000 and £250,000.
Continued COVID-19 support for UK corporates will come from a temporary enhancement to the period that losses can be set against previously taxed profits.
The change extends the carry back to 36 months from the previous 12 months with the extension limited to losses of £2 million. This will provide some loss-making companies with cash repayments from HMRC.
Further support comes from a 130 per cent super deduction against taxable profits where a company invests in new qualifying plant and machinery.
This is available for 24 months from 1 April 2021 and provides a tax saving of £25 for every £100 spent.
The intention is for this new advanced plant to enhance the production capability of the UK and grow the economy.
Reflecting on these Budget changes, it is evident the value of tax incentives for small or medium sized enterprises (SMEs) incurring expenditure on research and development (R&D) has significantly increased given the incentive allows SMEs to claim 230 per cent of their qualifying R&D expenditure as a tax deduction.
As this enhanced tax deduction can create or increase tax losses, these innovative SMEs may be able to access more valuable tax refunds by carrying losses back 36 months against previously taxed profits.
Additionally, as such companies normally incur expenditure on plant, the super deduction will further enhance this benefit.
Furthermore, profitable innovative companies will be able to make R&D claims to shelter more profit from the increased 25 per cent rate of CT applying from 23 April.
This will prevent cash leakage from the business that can be redeployed on trading or innovation activities.
A limitation to R&D relief being introduced from 21 April to combat perceived abuse is also of note.
Currently SMEs undertaking R&D can surrender a tax loss to HMRC for a cash payment equal to 14.5 per cent of the loss or, if lower, 230 per cent of the qualifying R&D expenditure.
The change caps the payment at £20,000 or 300 per cent of the company’s total PAYE / NIC for the tax period.
Some exceptions from the cap exist for companies creating Intellectual Property.
Given most companies undertake many forms of innovation we recommend all companies consider their innovation and seek advice on the availability of R&D relief, together with the effect of the cap on their anticipated claim.
Lastly, the Chancellor’s announcement of consultation on the UK’s R&D tax incentives to ensure the UK remains a scientific and technological superpower promises they are here to stay and are likely to be enhanced and targeted cross-sector.
Derek Gemmell is a partner and head of innovations tax at Anderson Anderson & Brown
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