Diamuid McDougall explains how the new R&D tax credit, due to come into effect at the beginning of April, will benefit a wide range of technology-based industry
Credit where it's due
The next few months could be hugely important to British businesses with the introduction of the new R&D credit.
On 1 April the government will introduce a new R&D credit, which can be treated like a grant and set against the cost of the investment by companies in their research or development. This comes after a huge number of submissions by businesses and industry bodies, particularly EEF and SMMT, calling for the change. A report by PwC, referred to in the latest consultation by HM Treasury on scheme design, shows the impact of the new credit on UK economic growth will far outweigh any additional cost of implementing it.
For our UK-based world leading manufacturers of high technology equipment the new R&D credit should be a much welcome boost. It will provide extra funding for a wide range of high technology businesses including manufacturers of industrial equipment, aerospace, life sciences and pharmaceutical companies and many others.
UK automotive companies should also find the new credit particularly helpful as they are investing in cutting edge green technologies, an area where many global car manufacturers are investing heavily to remain globally competitive. Other automotive supply chain companies will also benefit from the boost given to projects which involve developments of small numbers of high specification components and assemblies for customers.
While the government already provides an R&D benefit, it is accounted for by businesses as a tax which means it doesn’t reach the R&D budget holders who are responsible for R&D investments and this lack of visibility means it has much less impact on investment decisions. Worse still, it only provides cash saving if a company owes HMRC corporation tax on its profits – which may not be the case if the business has been investing heavily in R&D technologies, which many are, or if the business incurred losses in the downturn, as many did.
The beauty of this new credit is that it is payable to a business regardless of its tax position
The beauty of this new credit is that it is payable to a business regardless of its tax position so for the first time companies without any tax due will secure a cash contribution towards their R&D costs.
The mechanism for the new credit was set out in draft legislation published, for consultation, in December 2012 which provided for a credit at a minimum of 9.1% of the qualifying R&D expenditure. The credit is taxable so after deducting corporation tax at 23% (set to drop to 21% in future) this leaves cash saved at about 7% of the R&D costs. For administrative simplicity, the credit is ‘paid’ to a business by deducting it from the corporation tax it owes but companies without tax liabilities are actually paid the credit, after first capping it at the amount of PAYE & NI included in the R&D expenditure.
At the end of this month, we are expecting to see the final form of the legislation in the Finance Bill which may increase the credit from the 9.1% above, as many businesses have indicated that a headline rate of at least 10% would be more effective.
To help businesses manage the transition to the new credit, the existing R&D benefit will continue until 2016 and companies have the choice to elect for the new credit instead or stay in the current scheme. However, once the new credit has been elected for there is no going back to the current scheme which will be abolished for accounting periods commencing after 1 April 2016.
The credit will provide vital extra funding for businesses that may now be able to pursue projects that would otherwise have been abandoned. It will make the cost of doing R&D in the UK lower, thereby making our R&D centres more globally competitive, which in turn should help us attract and secure vital skills. Additionally, smaller businesses (less than 500 employees) will for the first time get a payable credit on R&D for customers. Many of these businesses face the risk that when they undertake R&D to develop a component for a customer, they may or may not recoup the cost when the item goes into larger scale production. Once in place, the payable credit will provide some protection against projects not reaching the production stage.
The new R&D credit commences at the same time as the new Patent Box scheme (which more than halves the tax due on profits made by businesses from the exploitation of patents – including the profits on sale of products which include the patented invention), a combination that gives a great boost for UK innovation. With interest rates remaining low, the US economy recovering, and continuing expansion in the fast growing economies of China and India, now is perhaps better than ever for British businesses to invest in the innovation that is needed to secure our future economic growth.
Diarmuid McDougall is a partner at PWC and leads its tax relief and Patent Box team