Tax experts say the legislation to make R&D tax credits ‘above the line’ in today’s Finance Bill is a huge boost to business, being a simpler and more competitive tax refund.
The Government has today published draft tax legislation with a range of fiscal policies to boost business investment, including introducing an ‘above the line’ tax credit for R&D.
The Finance Bill 2013 implements a number of tax policies announced at Budget 2012 and Autumn Statement 2012.
The R&D tax credit change, described by Diarmuid MacDougall, R&D and Patent Box partner at PwC as “brilliant news” for business, is the most significant change to UK R&D taxation in a decade.
Making the R&D tax credit above the line – allowing a company to subtract tax from the PAYE and National Insurance of its R&D staff – gives businesses main two advantages.
“Firstly R&D will be treated more like a grant, not a tax, when you set it against the R&D expenditure,” he says. “The cost of R&D is now simply lower and this is more competitive for firms in the UK.”
Secondly, the current tax credit scheme gives no benefit to companies who have gone through a period of making losses. “Under the new scheme the credit will be payable to them, even if they’ve filed losses. It’s the first time they will be eligible for this rebate.”
Large companies with more than 500 employees who have restructured during the recession and capital intensive industries such as automotive, especially, will benefit from this change. Innovative businesses across the manufacturing, engineering aerospace & defence and pharmaceutical sectors had already indicated they are very keen on the scheme, before it was set in legislation today.
Companies with fewer than 500 employees can already apply for a payable credit.
The new R&D tax credit pays a flat rate of credit of 9.1% before a 21% deduction, so the cash value of the credit is 7%. It will be payable for any R&D incurred from April 1, 2013.
“[The change] at this point in the economic cycle shows the Government is very keen to stimulate investment and support those who are exporting,” says Mr MacDougall. “It’s a simple scheme, for a flat percentage of R&D expenditure for all, and therefore much easier to understand.
The tax credit change should appeal to large multinationals. “This should be attractive to multinational companies looking to locate foreign operations,” MacDougal adds.
The draft legislation confirms that the new credit will initially be optional but will completely replace the existing scheme from 2016.
The legislation is open to technical consultation until February 6, 2013.
Finance Bill 2013 will include key government measures to support growth, including:
• reducing the main rate of corporation tax to 21% in 2014;
• increasing the annual investment allowance for plant and machinery to £250,000 for two years from 1 January 2013;
• introducing tax reliefs that are among the most generous in the world for the video games, high-end TV and animation industries; and
• introducing an ‘above the line’ tax credit for R&D.