A Focus On Innovation Tax Matters

R&D Tax Credits

The government has an ambitious target to raise total investment in research and development to 2.4% of UK GDP by 2027. R&D tax reliefs have a key role in incentivising this investment by reducing the costs of innovation. It is therefore important to ensure that the reliefs remain up-to-date, competitive and well-targeted.

The government has announced a review of the reliefs, supported by a consultation with stakeholders. This consultation will explore the nature of private-sector R&D investment in the UK, how that is supported or otherwise influenced by the R&D relief schemes, and where changes may be appropriate.

Interestingly the key components of the consultation document appear to be:

The concept of ‘additionality’ (i.e. how much extra investment is made following a successful R&D claim) and the fact that RDEC is better value for money for the UK taxpayer than the more generous SME relief. HM Treasury appear to be considering the merger of both the SME regime and RDEC into one composite system. How this will look is uncertain and who the winners and losers would be is unclear
There is a great deal of focus on the role of R&D boutiques and no win no fee arrangements impact taxpayer claims and behaviours
Extending the qualifying categories of expenditure
Re-defining the territorial scope of R&D, and clarifying where expenditure made to overseas parties can be included in a claim

Any changes that are to be made to the R&D regime are likely to be easier now that EU state aid legislation is no longer relevant.

The Government also confirmed that for accounting periods beginning on or after 1 April 2021, the amount of SME payable R&D tax credit that a company can receive in any one year will be capped at £20,000 plus three times the company’s total PAYE and National Insurance contributions liability, in order to deter abuse.

Super Deductions

In true R&D tax credit style there will also be a temporary increase in reliefs for expenditure on plant and machinery. For qualifying expenditures incurred from 1 April 2021 up to and including 31 March 2023, companies can claim in the period of investment:

a super-deduction providing allowances of 130% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances
a first year allowance of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances

In combination with the annual investment allowance this measure should support those businesses who are making continued investment in plant and machinery.

CGT and EIS

The Chancellor announced no changes to CGT generally, business asset disposal relief (entrepreneurs relief) and the enterprise investment scheme – however they have extended the operation of ‘social investment tax credit’ to April 2023. This will continue availability of Income tax relief and Capital Gains Tax hold-over relief for investors in qualifying social enterprises, helping them access patient capital.

The inactivity on BADR and the continuation of the enterprise investment scheme will be very welcome across the board.

Enterprise Management Incentives (EMI)

In a move that strongly indicates that the differential between CGT and income tax rates will be maintained (and not aligned as many had feared), the government has announced a call for evidence in relation to enterprise management incentive schemes (EMI). The tenor of the document appears to be such that there is a desire to extend the scheme to companies that currently do not qualify. In a similar vein to R&D any changes to EMI (or EIS for that matter) are likely to be easier to achieve post-Brexit.

Having helped numerous businesses with share schemes in the last twelve months since the Covid19 pandemic began we know how important the EMI provisions are and we see this as very welcome.

Other announcements

There were a wide range of announcements about non tax related R&D funding measures. Clearly the government is placing a lot of emphasis on R&D and innovation in terms of driving the UK economy going forwards. This includes a ‘Build Back Better’ growth strategy document, the introduction of Freeports, a ‘Help to Grow’ scheme for SMEs, and a ten point plan for a ‘green industrial revolution’.