Sometimes the Government actually seems to have a coherent long-term plan for the UK economy ….. and then sometimes it does things like the amendments to the Feed-in Tariff regime, which really makes you wonder about its strategic direction. Anyway, I have lambasted them enough about the FiT (at least for now) so I will move into praise mode and deal with the latest amendments to the R & D tax relief regime.
I believe that the Government has correctly identified that the future shape of the UK economy must be based on our particular strengths. Until 2007 this would definitely have included banking and financial services, but that might not be such a straightforward claim to substantiate these days. It still, however, definitely includes high-end manufacturing and innovation, which is where the commitment of successive governments to R & D tax reliefs comes in.
Barely a Budget goes by without the introduction of further improvements to an already generous tax regime, and Budget 2012 is no exception. There are 2 major and 1 minor improvements to the regime:
1. Percentage enhancement of R & D expenditure
The basic principle of the R & D tax regime is the enhancement for corporation tax purposes (for the reliefs apply only to companies) of R & D expenditure. This can take one of two forms. The first is a simple enhancement of tax allowable R & D expenditure to offset against trading profits, and the second is the surrender of similarly enhanced R & D expenditure for a 14% tax credit (effectively a cash payment from HMRC), which is for the benefit of companies that have not yet started making profits from their R & D activity.
Prior to 1 April 2012 the enhancement percentage was 200% (i.e. the expenditure was doubled for corporation tax purposes), but it is now 225%. Thus the effective rates of relief for R & D expensiture are now as follows:
Claim against profits
Small profits rate (up to £300,000) 45%
Large profits rate (above £1.5 million) 54%
Marginal rate (£300,000 to £1.5 million) 56.25%
Given the convergence between the small and large profits rates, I suspect this distinction will, within a few years, be irrelevant, but for now it matters.
Surrender for cash
Cash payment of 31.5% of R & D expenditure (was 28% pre-1 April 2012).
The second major change affects the surrender for cash regime specifically. Prior to 1 April 2012 it was not possible to claim a cash payment in excess of the PAYE & national insurance that the company had paid for the accounting period of the claim. Given that this relief is intended to help unprofitable companies, and thus aimed at those who are not yet able to commercially exploit their R & D, this always struck me as a really counter-productive restriction, which prevented many hard-pressed businesses from obtaining a much needed cash injection. Clearly someone in the Treasury felt the same way, because from 1 April 2012 that restriction is abolished, which will open up the regime to a great many companies which could not previously take timely advantage of it to improve cash flow.
The third change is much less wide-ranging in scope. Prior to 1 April 2012 it was not possible to make a claim unless you had spent at least £10,000 on R & D in an accounting period. Again I was never clear why this was the case, and from 1 April 2012 this restriction is also abolished.
The R & D tax regime remains of vital importance to the innovators in the UK business sector, and it can only be a good thing that even more companies will now be able to benefit from it, and on an improved basis, particularly if the government is correct (as I think it is) in marking out innovation as the future of the UK economy.