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R&D Tax Credits – Budget Incentives for Future Growth

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Thursday April 5, 2012 at 10:58am

The Budget brought excellent news for businesses involved in product innovation: an improved tax credit system will be applied to research and development.

For many companies, growth in years ahead is dependent on research and development now. Tomorrow’s cutting edge products have to be devised today, but in the current economic climate investing the considerable sums of money needed for R&D is a hard and even risky decision. It can be many years before a return is made on such investments and with companies pulling in their horns the future growth of the economy has been in danger as research and development is cut back.

From 1st April 2013, however, the R&D tax relief programme will change. The new system introduces “above the line” R&D tax credits. Currently, R&D tax relief represents a reduction in the tax charged to a company. The new “above the line” R&D tax credits, however, will be recorded in the company’s accounts as profit before tax.

This brings a number of benefits:

  • Companies trading at a loss will still be able to claim tax credits. 
  • The final rate has yet to be decided but will be a minimum of 9.1%. This compares with the current R&D tax relief benefit for large companies of less than 7.5% of the gross R&D spend – a figure which would fall as corporate tax rates drop. 
  • Currently tax relief is something applied after the event by the tax department along with various other claims. An above the line system enables tax credits to be clearly owned by research divisions and made a part of investment decisions. This will make R&D projects more affordable and encourage new investments.

Investing in the Future

The same philosophy has also been applied to other creative fields, with tax relief schemes announced to encourage investment in the UK’s film, television and games industries. The Chancellor noted in his Budget:

"The film tax credit, protected in our spending review, helped generate more than £1bn of film production investment in the UK in the last year alone. Today I am announcing our intention to introduce similar schemes for the video games animation and high-end TV production industry."

Notes of Caution

R&D tax credits have been broadly welcomed by industry and investors and are certain to increase UK R&D projects. They are also a powerful incentive for foreign investors to make Britain the favoured choice for research and development.

However, R&D tax credits already exist for SMEs but the time taken to process claims is sometimes a problem. We’d like to see the process speeded up. Whilst it’s only a small move by the Government to encourage growth it’s one we should definitely welcome.

The UK is renowned as a great centre for innovation and creativity, and these tax breaks can only help capitalise on the wealth of talent in companies nationwide.

Andy Parker
Chartered Accountant Birmingham

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Parker Chartered Accountants and Financial Advisors is the trading name for Parker Business Development Ltd (Registered No. 4116664), Parker Tax and Trust Ltd (Registered No. 06950353) and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here