Budget 2021 – Enhanced Value of R&D for Companies

The cost to the taxpayer of Covid by the end of the next financial year is predicted to be £407 billion, much of which has been funded by debt. 

While setting out his continued ‘whatever it takes’ Covid support for the UK, the Chancellor confirmed companies have received considerable support and will be the first to fund the recovery.   

From April 2023, companies with profits in excess of £250,000 will have to manage an increase in Corporation Tax to 25%. Companies with profits below £50,000 will remain taxed at 19% with a taper graduating the effect on companies with profits between £50,000 and £250,000.  

Continued Covid support for UK corporates will come from a temporary enhancement to the period that losses can be set against previously taxed profits. The change extends the carry back to 36 months from the previous 12 months with the extension limited to losses of £2m. This will provide some loss making companies with cash repayments from HMRC.  

Further support comes from a 130% super deduction against taxable profits where a company invests in new qualifying plant and machinery. This is available for 24 months from 1st April 2021 and provides a tax saving of £25 for every £100 spent. The intention is for this new advanced plant to enhance the production capability of the UK and grow the economy.     

Reflecting on these Budget changes, it is evident the value of tax incentives for small or medium sized companies (‘SME’s’) incurring expenditure on R&D has significantly increased given the incentive allows SME’s to claim 230% of their qualifying R&D expenditure as a tax deduction. 

As this enhanced tax deduction can create or increase tax losses, these innovative SME’s may be able to access more valuable tax refunds by carrying losses back 36 months against previously taxed profits. Additionally, as such companies normally incur expenditure on plant, the super deduction will further enhance this benefit.    

Furthermore, profitable innovative companies will be able to make R&D claims to shelter more profit from the increased 25% rate of Corporation Tax applying from April 23rd. This will prevent cash leakage from the business that can be redeployed on trading or innovation activities. 

A limitation to R&D relief being introduced from April 21st to combat perceived abuse is also of note.

Currently SME’s undertaking R&D can surrender a tax loss to HMRC for a cash payment equal to 14.5% of the loss or, if lower, 230% of the qualifying R&D expenditure. The change caps the payment at £20,000 or 300% of the company’s total PAYE / NIC for the tax period. Some exceptions from the cap exist for companies creating Intellectual Property. 

Given most companies undertake many forms of innovation, we recommend all companies consider their innovation and seek advice on the availability of R&D relief, together with the effect of the cap on their anticipated claim. 

Lastly, the Chancellor’s announcement of consultation on the UK’s R&D tax incentives to ensure the UK remains a Scientific and Technological superpower promises R&D tax incentives are here to stay and are likely to be enhanced and targeted cross sector.   

If you have further questions on any of the Budget announcements, please contact Head of Innovations Tax and Partner, Derek Gemmell or your usual AAB contact.

Our Budget webinar will be hosted by Benny Higgins on the 10th March, and will feature one of Britain’s leading economists, John Kay as well as AAB’s tax specialists to share their insights on the 2021 Budget. If you haven’t already done so, you can register for the webinar here.