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Sun May 16 2021

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Potential impacts to your R&D tax claim

13 Apr The 2021 budget announcement limits the size of some R&D tax cash benefits, but will it impact your claim?

The R&D tax credit scheme rewards companies for facing challenges and uncertainties by developing new processes or methodologies or improving on existing ones (technological advancements). All while using a systematic approach.

In the construction industry, the general activity of most companies will not be driven by technological advancements instead, they are generally driven by a client-led goal e.g. renovating a listed building. The way the construction industry advances, especially within the SME market, is through the challenges it faces. 

On Wednesday 3rd March, Rishi Sunak made possibly one of the most important modern budget announcements, outlining the plan to get our economy back on-track and providing us with insight regarding: the increase in corporation tax, the impact this will have on research & development expenditure credit (RDEC) and SMEs, the super deduction and, finally, the R&D tax review.

Corporation tax

The rate of corporation tax will increase to 25% from April 2023, a 6% increase from the current rate of 19%. The increase is expected to raise £22bn in revenues per year whilst keeping the UK’s rate of corporation tax as the lowest in the G7.

The smallest companies will not be affected as a small profits rate will be introduced for businesses with less than £50,000 profit. These businesses, which is estimated to account for 70% of actively trading companies, will continue to pay corporation tax at the current rate of 19%. A tapered rate will also be introduced for profits of over £50,000 so that only businesses with profits above £250,000 will be taxed at the full rate of 25%.

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Super-deduction

For a two-year period from 1st April 2021 until 31st March 2023 businesses will be able to claim the super-deduction on their investment in qualifying plant and machinery. This will allow companies to deduct 130% of what they invest from their taxable profits in the form of a capital allowance. This equates to a saving of 25p for every £1 invested in plant and machinery.

The aim is to encourage businesses to invest. Levels of business investment in the UK, already low in comparison with the UK’s peers, have fallen sharply during the pandemic with a reduction of 11.6% between Q3 2019 and Q3 2020. The super-deduction aims to give companies the incentive and the confidence to invest in their business and ultimately promote economic growth.

R&D tax consultation

The government will be running a review of the R&D tax relief scheme which plays a vital part in promoting innovation and stimulating growth in the UK economy. The government has set a target or raising total investment in R&D to 2.4% of GDP by 2027. The consultation, therefore, aims to ensure that the current R&D tax relief schemes in the UK are still fit for purpose.

The consultation will seek the views of stakeholders on the R&D tax relief schemes currently in operation and will focus on:

  • Definitions, eligibility and scope of the reliefs – are they up to date with modern business practices and do they currently exclude activities that should qualify?
  • How well they operate for businesses and HMRC – are there ways they could be improved in terms of structure and administration?
  • Targeting of the reliefs – do they maximise the value of R&D activity for the UK economy.

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