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Fresh Corporate R&D Strategy is Needed for Post-pandemic Recovery

As the UK reached the first anniversary of the initial Covid-19 lockdown on 23 March 2020, it was a day to reflect on the impact the coronavirus pandemic has had on our lives. We have all faced challenges over the year, with the crisis affecting homes and families, businesses and the economy.

There has been particular disruption to R&D-intensive businesses in some sectors – and therefore to UK research and innovation as a whole.

According to the UK Office for National Statistics (ONS), companies account for around 70% of all R&D activity in the country. While some R&D-intensive sectors, notably biopharmaceuticals and internet services, have weathered the COVID-storm, others such as aerospace, automotive and oil and gas, have been hard hit.

The ONS figures show that in 2018, those sectors that have been badly affected by the pandemic accounted for around £6 billion of UK R&D, nearly a quarter of total corporate investment.

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Companies in these sectors have suffered from a collapse in demand and unprecedented market conditions, resulting in structural changes and job losses. BP, Shell, Rolls Royce and Airbus all announced cuts to their workforces of between 10% – 20% last year, or 10,000 – 25,000 jobs per company. The Society of Motor Manufacturers and Traders estimates 11,000 UK jobs were cut by carmakers and their supply chains in the six months to July 2020.

While there are uncertainties over the full impact on the wider research effort, CaSE has heard from leading companies that R&D has been scaled back significantly, as they focus on keeping cash in the business. Restoring R&D activity is expected to take years, not months. It seems likely there will be knock-on effects beyond these sectors, for example in the adoption of automation processes in manufacturing in general, or in the pace of cross-sector research programmes, such as in battery technology.

In the midst of this bleak picture come opportunities, as companies re-prioritise and focus on new growth areas. As one example, energy and transport companies are accelerating their ‘green revolution’. These could dove-tail with government priorities such as Net Zero and ‘Building back better’, given the right support.

Conditions for growth

The UK government has set a target of approximately doubling R&D to 2.4% of GDP by 2027. In the face of the apparent blows to R&D in some quarters, and the aim of growing R&D as a whole, it seems wise to assess the state of corporate R&D.

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Given this, CaSE has called on the government to consider the value of a business R&D strategy, to provide a much-needed national, coordinated and concerted approach to incentivise and grow corporate R&D in the UK, and provide a platform to help drive recovery and prosperity, on a national and international level.

We were pleased therefore, when the government published ‘Build Back Better: our plan for growth’ earlier this month. This is a welcome step, with ideas on how to drive growth through infrastructure, skills and innovation. In particular, it promises an innovation strategy, to be published in the summer of 2021.

CaSE is actively informing the development of this strategy, and at pace. It is hoped long-standing ideas such as creating a digital shop window to simplify navigation of innovation support will be included, as well as initiatives to ensure resilience of the research and innovation system in the longer term. And the government will need to follow through swiftly from strategy to delivery in order to retain and stimulate business investment and ensure R&D plays a full role in the UK’s economic recovery.

The effects of the COVID-19 pandemic will be long-lasting. Reflecting a year on, we can see the opportunity presented by becoming the best place to conceive, develop and grow next generation technologies. An innovative, future-facing environment such as this could sustain the future of hard-hit businesses and drive the broader economic and health recovery we all want to see. Working together with business and government, CaSE is determined to turn this ambition into a reality.

By Sarah Main

Source: Science Business

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Enhanced value of research and development for companies

While setting out his continued ‘whatever it takes’ COVID-19 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 (CT) to 25 per cent per cent.

Companies with profits below £50,000 will remain taxed at 19 per cent with a taper graduating the effect on companies with profits between £50,000 and £250,000.

Continued COVID-19 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 £2 million. This will provide some loss-making companies with cash repayments from HMRC.

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Further support comes from a 130 per cent super deduction against taxable profits where a company invests in new qualifying plant and machinery.

This is available for 24 months from 1 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 enterprises (SMEs) incurring expenditure on research and development (R&D) has significantly increased given the incentive allows SMEs to claim 230 per cent of their qualifying R&D expenditure as a tax deduction.

As this enhanced tax deduction can create or increase tax losses, these innovative SMEs 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 per cent rate of CT applying from 23 April.

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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 21 April to combat perceived abuse is also of note.

Currently SMEs undertaking R&D can surrender a tax loss to HMRC for a cash payment equal to 14.5 per cent of the loss or, if lower, 230 per cent of the qualifying R&D expenditure.

The change caps the payment at £20,000 or 300 per cent 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 they are here to stay and are likely to be enhanced and targeted cross-sector.

By Derek Gemmell

Source: Scotsman

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Corporation Tax To Increase To The New 25% Rate

Chancellor Rishi Sunak has confirmed plans to raise corporation tax rates to 25% by April 2023.

Sunak put “profitable” businesses in the cross hairs of his initial revenue raising plans to pay for the £407bn cost of Covid support measures.

Corporation tax rates will also be tiered for the first time with firms making an annual profit of £50,000 or less continuing to pay the current 19% rate.

Rates will then be tapered up to £250,000 profits when companies will pay the new 25% rate from 2023.

Sunak said only 10% of firms would pay the new higher rate.

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Treasury documents show that the corporation tax increase is expected to raise between £12bn and £17bn annually from 2023.

The move reverses a decade of corporation tax cuts by previous chancellors and will make the main UK rate on a par with China’s at 25%.

The government will also invest over £100m in a Taxpayer Protection Taskforce of 1,265 HMRC staff to combat fraudulent Covid support package claims.

In better news for business a new “super-deduction” scheme will come into force from 1 April 2021 until 31 March 2023.

Construction companies investing in qualifying new plant and machinery will benefit from a 130% first-year capital allowance.

Sunak said: “Under the existing rules, a construction firm buying £10m of new equipment could reduce their taxable income, in the year they invest, by just £2.6m.

“With the Super Deduction, they can now reduce it by £13m.”

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Rob Oliver CEO of the Construction Equipment Association said: “We look forward to reviewing the details, but on the face of it, it looks like it will be a great time to renew the machine fleets of plant hirers and contractors.

“These tax concessions are clearly a quid pro quo for swallowing a corporation tax hike in the future”.

Paul Hamer, CEO of Sir Robert McAlpine, said: “The planned ‘super deductions’ for businesses investing is good news, and could see innovation accelerate right across the sector as firms commit money to new technologies and sustainable construction solutions.

“The positive ripple effect could be significant and we will be looking closely at how this may benefit our business and future projects.”

Source: Construction Enquirer

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Corporation Tax Increase Is A Self-defeating Strategy

As a Corporation Tax rate (currently 19%) rise remains a possibility for this year’s budget on 3 March, Chris Denning, Head of Corporate and International Tax at MHA MacIntyre Hudson, believes the government needs to stimulate enterprise and investment and, like it or not, the Corporation Tax rate is a seen a bell weather for the attractiveness of the UK economy.

Denning said, “Small changes in tax rates are more about influencing behaviour and sending a message than raising revenue. For foreign investors, already nervous about the post-Brexit environment, a rise in the headline rate of Corporation Tax could be the straw breaking the camel’s back for any potential overseas investment.

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This would not necessarily be due to the extra tax in and of itself, but because of the message it sends out about the UK’s willingness to preserve the current fiscal regime which foreign investors find attractive and is one of the key drivers in the UK being a preferred location when businesses are expanding internationally.

“The UK needs a fiscal regime centred around international competitiveness now more than ever. The Chancellor should concentrate on growth and the way to do that is to create a vibrant economy. He needs to use his fiscal tools, like varying tax rates, in a positive rather than a negative way.

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We have good foundations in place already, with our foreign dividend and participation exemptions, R&D tax relief, Patent Box relief and the Capital Allowance regime. It is vital not to backslide on this as post-Brexit the UK is arguably now less attractive to overseas investors. With borrowing also currently very cheap, there is no need to pay for the pandemic in the short term.

“Corporation tax revenues are a relatively small part of the UK’s total tax intake (circa 6% in 2019/20) and total receipts have increased in recent years, despite the main rate being lowered in 2017 (from 20% to 19%).* A rise in the tax rate, even if it raised more revenue, could not raise enough to compensate for the damage to the UK’s reputation for competitiveness.”

Source: London Loves Business

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