The hand that gives, also takes away
For innovative businesses, today's (3 March) Budget is a mixed bag. The increase in Corporation Tax is likely to be felt most keenly, but the surprise announcement of a huge first-year capital allowance deduction may soften the blow for some.
Corporation Tax Rises
The corporation tax rate will rise to 25% from 1 April 2023 but there will now be a new Small Profits corporation tax rate of 19% which will apply to profits up to £50k. Thereafter tapering to the main rate of 25% for profits over £250,000.
What does this mean for the various UK technology incentives and reliefs?
- The R&D expenditure credit (RDEC) plays a crucial role in the Government's efforts to stimulate and support innovative R&D projects among the UK's larger firms. For businesses claiming the credit, the rise in Corporation Tax will equate to a lower benefit as it is a taxable relief.
It is a shame that the Government has not increased the RDEC rate to counteract this tax rise, but there is still time to do that in future Budgets between now and 2023.
R&D Tax Credit
- Ordinarily, the change in Corporation Tax would not affect claimants of the R&D tax credit, however, from April this year, the annual credit received will be capped at £20,000 plus three times the firm's PAYE and NIC liability. Intended to enable loss-making firms to claim up to 33% of their qualifying R&D expenditure as a credit payment, the change is aimed at preventing its misuse.
R&D Tax Relief
- For profitable SMEs, the tax rise would also see the value of R&D tax relief go up. This is because the relief is designed to artificially reduce the amount of profit a company pays taxes on, by allowing the claimant to deduct 230% of qualifying costs from their annual profit in the form of a tax relief.
- Patent Box gives qualifying firms with patent rights on their products, an opportunity to apply a lower (10%) rate of Corporation Tax on profits earned from sales of products protected by qualifying patents. The increase in Corporation Tax would therefore increase the value of the benefit. There were rumours of some changes to Patent Box specifically, but ultimately no announcements regarding the scheme were made.
- From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will benefit from a 130% first-year capital allowance. This upfront super-deduction will allow firms to cut their tax bill by up to 25p for every £1 they invest, ensuring the UK capital allowances regime is among the world's most competitive. This will be the single biggest business tax cut in modern British history.
- This should particularly help capital intensive businesses. With a drive towards high technology businesses and also a green economy, this seems like a strange tax break which will not help the most innovative companies nor ensure capital is spent to increase energy efficiency.
- A new consultation on this with the goal of making the R&D tax scheme the most competitive in the world was formally announced today. MMP has a seat on the R&D consultative committee and will be participating again with this latest consultation process as well as fervently speaking on behalf of innovative businesses across the country at the committee with HMRC.
- The Government has also published their summary of the responses from last year's consultation that MMP contributed to on widening the areas of eligible expenditure under the R&D tax scheme. The focus was particularly in regard to data and hosting costs.
Eight Freeports in England are also being established. These will be located in East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames.
Businesses in these areas will benefit from a number of tax reliefs including an enhanced 10% rate of Structures and Buildings Allowance. An enhanced capital allowance of 100%, full relief from stamp duty land tax, full business rates relief
And if you are finding you need a bit of a pick me up, rest assured the planned increases in alcohol duties have been cancelled!