With only a few days to go before the election on Thursday, there are questions around how R&D and the patent box will be impacted.
We explore what the key party manifestos say and identify whether companies can expect to enjoy the benefits of these valuable tax reliefs going forward.
The Conservatives proposed an increase in the R&D Expenditure Credit (RDEC) rate from 12% to 13%. They will also review the definition of R&D to support investments in cloud computing and data.
Labour announced that they will move away from blanket R&D reliefs to more direct funding and will be looking to phase out R&D tax credits for large companies as well as the Patent Box. They have, however, indicated that R&D tax relief for small and medium enterprises (SMEs) will continue.
The Liberal Democrats announced that they will allow companies to claim R&D tax credits against the cost of purchasing datasets and cloud computing.
The impact of a change in corporation tax rates on R&D tax reliefs and the Patent Box cannot be overlooked, with Labour seeking to gradually increase the main rate of corporation tax from its current 19% to 26% by April 2022, and the Liberal Democrats planning to increase the corporation tax rate to 20%.
So what does this all mean for companies who are incurring qualifying R&D expenditure?
There is no change to the tax relief that SME companies will receive on qualifying R&D spend in the Conservative manifesto. Currently the SME scheme allows a company to claim an additional 130% tax deduction for qualifying spend which is equivalent to a £43.70 reduction in corporation tax for every £100 spent on qualifying R&D.
The proposed increase in the corporation tax rate will mean that the R&D reliefs under the SME scheme will become even more valuable, with a £59.80 reduction in corporation tax for every £100 spent on qualifying R&D when the main corporation tax rate rises to 26% from April 2022.
Under a Liberal Democrat government, an increase in the corporation tax rate to 20% will give rise to a £46 reduction in corporation tax for every £100 spent on qualifying R&D.
There appears to be no proposed change to the ability of loss-making companies to cash in their R&D tax losses under the SME scheme at up to £33.35 for every £100 of R&D spend.
Large companies that do not qualify for the SME scheme currently receive a reduction in their corporation tax liability of £9.72 for every £100 spent on qualifying R&D under the RDEC scheme.
The Conservatives propose an increase in the RDEC rate from 12% to 13% which will in turn increase the tax benefit to £10.53 for every £100 spent on qualifying R&D.
Under a Labour government, R&D relief for larger companies will be phased out altogether.
The proposed increase in the corporation tax rate in the Liberal Democrats’ manifesto will reduce the tax benefit to £9.60 for every £100 spent on qualifying R&D.
The Patent Box tax incentive currently taxes profits that are attributable to qualifying patents at a reduced rate of 10%, which is a 9% discount on the current corporation tax rate (19%).
An increase in corporation tax rates, as announced by Labour and the Liberal Democrats, will mean that the Patent Box tax incentive will become even more valuable in the future. However, this comes with the announcement that Labour will be looking to phase out the Patent Box altogether, so it may not be here to stay.
Whatever the outcome of the election there are certainly interesting times ahead.
Please contact Simon Crookston for any further information or if you would like to discuss this further.