By Martin Hook, Managing Director, of Alma CG UK
In an era when innovation is key to capturing a competitive edge in the globalised economy, it is worrying for the future of UK growth that according to the Office for National Statistics, Britain spent less on R&D than the rest of the EU in 2012. Research has revealed that the role of R&D for the future growth of the UK economy could not be more essential, with estimates showing that for every £100m the UK invests in R&D, the direct and indirect economic benefits total £290m. The Government does offer a number of incentives, including tax benefits to encourage investment in R&D; however as the research shows there is still more to be done to boost R&D in the UK. The Chancellor announced a number of changes that will impact R&D in this year’s summer Budget that companies need to be aware of.
1) Corporation Tax
The reduction in corporation tax to 19% in 2017 and 18% in 2020 is good news for British companies, allowing greater investment and economic growth. However, from the perspective of R&D tax relief, it will reduce the amount of benefit claimable for tax-paying SMEs. Nevertheless, this will slightly increase the benefit available for large companies through the R&D Expenditure Credit scheme from 2017 onwards. It is worth noting that the R&D tax benefit claimable by all loss-making businesses of all sizes will not be impacted by this change.
2) Annual Investment Allowance (AIA)
The current £500k AIA was only ever going to be short term, however we had hoped the Budget might announce its return to the previous rate of £250k. Nevertheless, given that the rate had been due to fall to £25k at the end of the year, the new permanent level of £200k is welcome news. Additionally, the continuity promised by a new permanent rate will allow businesses to plan their medium to long-term R&D strategies and investment with greater confidence.
3) R&D Tax Relief
The Government has corrected an anomaly in the Research & Development Expenditure Credit legislation, meaning that universities and charities will no longer be able to claim on expenditure from 1st August 2015 onwards. Whilst this may be disappointing for some institutions, this was never the policy’s original intention and is an area which needed clarification.
4) The National Living Wage
The announcement that as of April 2016 a new minimum wage of £7.20 will be put in place, rising to £9 by 2020, was not expected. Many SMEs are going to feel this financial hit keenly as employment is usually the biggest cost for companies. However, changes to corporation tax could help to off-set this added burden.
5) HMRC investment
An investment of £750m has been set aside by the Chancellor to target tax evasion. Whilst the Treasury has said that this policy is expected to bring in £9 from every £1 invested, this is a significant amount of money to solely tackle tax evasion. At a time where many areas of HMRC are lacking sufficient funding, the money may have been better used to also improve other frontline services. For instance, we have noted that due to HMRC restructuring and R&D unit closures, there has been an impact on tax claim processing times which can delay much needed tax relief for innovating businesses.
This only emphasises that genuine tax incentives, such as R&D tax relief, are increasingly important to companies wanting to legitimately manage their tax position.
The future of R&D
It is well-documented that innovation and investment are key to growing the UK economy and as such it is essential that there are greater incentives for SMEs. SMEs are the lifeblood of the UK economy, responsible for employing over 24 million people. The support of innovation grants and funding will not only encourage essential job creation and economic growth; they will allow Britain to continue to compete in fast-growing markets.
It is important that businesses have a good understanding of the Chancellor’s R&D changes in order to take advantage of opportunities and avoid potential pitfalls. We recommend seeking professional advice if there is any confusion so that relevant issues to your business can be identified.