In June 2010, the Coalition Government began its term by announcing a number of immediate changes to the corporate tax landscape, with the intention of making the UK more attractive to businesses. This, weighed against the pressure to find £155bn in cuts to spending, leaves the government with some tough choices.
When looking at which aspects of UK business will lead the country out of recession, David Cameron has clearly shifted the focus away from financial services, towards sectors such as manufacturing and UK innovation. Surely then, you would expect that the R&D tax relief regime is here to stay, incentivising UK businesses to invest in R&D?
However, when you consider that the removal of the R&D tax relief regime for large companies (i.e. allowing it to continue for SMEs) would fund the 1% reduction in mainstream corporation tax (announced in the post election budget), you can appreciate the government’s dilemma.
In the post election budget, Chancellor George Osborne announced to “agree with business a long term approach to the proposals from James Dyson on Research & Development”.
Dyson’s report, entitled ‘Making the UK the leading High Tech exporter in Europe’ proposed a refocus of R&D tax credits on hi-tech companies, small businesses and start-ups, and when public finances allow, the rate should be increased to 200% (currently 175% for small or medium sized businesses). The report also recommended that the process of claiming the relief be simplified.
R&D tax relief, and in particular the cash credit is hugely valuable to companies, often representing the life blood of fledgling technology businesses. The relief is available to companies that are seeking to develop or achieve an improvement in a product or process, and in doing so, achieve an advance in science or technology, through the resolution of uncertainty.
The relief provides SMEs with a 175% enhanced tax deduction for qualifying costs. This relief is offset against taxable profits, or may (subject to certain criteria), be surrendered for a cash credit (£24.50 per £100 spent). For large companies, the relief provides for a 130% enhanced tax deduction, offset against taxable profits (the large scheme does not allow for a cash credit).
With the emphasis shifting towards smaller start-up technology companies, many large companies, (and perhaps smaller non-‘hi-tech’ companies) may well only have a limited window to be able to benefit from this valuable tax relief.
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