As always, rumours abound (and conflict) as to what Rishi Sunak's red suitcase will include, but with the understandable pressure the nation's finances are under, due to the effects of the Covid-19 lockdowns over the past 11 months, it is almost guaranteed that taxes will have to go up.
So, when will these tax rises happen and what form will they take? What effect will any changes have on the UK's innovative businesses and their respective UK investments in technology?
Below is a summary of what we consider is likely to be announced and what its impact will be on companies investing in technology.
Corporation Tax and its impact on tax incentives
One thing is almost certain. It is widely expected that Corporation Tax will rise, the only doubt is by how much. The Sunday Times reports that it will be a staggered increase from the current 19% up to 23% by 2024, while City AM understands 24% will be the final rate.
What does this mean for the various incentives and reliefs for UK tech investment?
- The R&D expenditure credit (RDEC) plays a crucial role in the Government's efforts to stimulate and support innovative R&D projects among the UK's larger firms. For businesses claiming the credit, a rise in Corporation Tax will equate to a lower benefit as it is a taxable relief.
- There is, however, a possibility that a range of other measures could be introduced as part of the Government's roadmap for encouraging post-Brexit growth. For instance, alongside the taxation rise, the RDEC rate (currently at 13%) could be increased to negate the impact of this tax rise for companies pursuing R&D projects. Having been increased more than once since its introduction in 2013, it wouldn't be surprising if the RDEC rate was further increased to offset the impact of the Corporation Tax rises which we would encourage.
R&D Tax Credit
- A change in Corporation Tax would not affect claimants of the R&D tax credit. The credit enables loss-making firms to claim up to 33% of their qualifying R&D expenditure as a credit payment.
R&D Tax Relief
- For profitable SMEs, any tax rise would see the value of R&D tax relief go up. This is because the relief is designed to artificially reduce the amount of profit that a company pays taxes on, by allowing the claimant to deduct 230% of qualifying costs from their annual profit in the form of a tax relief.
- Patent Box gives qualifying firms with patent rights on their products, an opportunity to apply a lower (10%) rate of Corporation Tax on profits earned from sales of products protected by qualifying patents.
- Any increase in Corporation Tax would therefore increase the value of the benefit.
- In this post-Brexit environment we now find ourselves in, the Government may also attempt to improve the effectiveness of Patent Box with a simplifying of the requirements.
Welcome changes for innovative businesses
There are also a number of ways that this year's Budget could be supportive of innovative UK businesses. These include:
- Following on from last year's consultation on costs eligible for the R&D tax schemes, we expect an announcement regarding a widening of the applicable areas of expenditure considered for the scheme. It might mean claimants could include more areas of business expenditure, specifically data and hosting costs, in their R&D tax applications.
- It is likely that the Government will increase grants and funding for businesses in an effort to stimulate the economy and boost growth of UK firms. These could be based around its carbon reduction agenda or take the shape of new Enterprise Zones areas, supporting areas of the country hit particularly hard by Covid-19. There may also be the unveiling of grants that would replace EU-affiliated ones.
Of course, there is also a distinct possibility that the Chancellor will have some further surprises up his sleeve to be unveiled on the day.
We'll be sending out an update next week once the Budget has been announced.