The UK government’s plan to revamp the R&D tax relief system could mark a significant turning point for businesses engaged in innovation. But how will this impact the diverse spectrum of companies, from startups to conglomerates, particularly when they are still grappling with the economic aftermath of the pandemic? InternationaTaxReview shared their thoughts.

A Surge in R&D, Yet Changes Loom

Despite the shadow of the pandemic, R&D expenditure in the UK showed an encouraging leap, reaching £44.1 billion in 2021-22. This resilience underscores the importance of R&D incentives, a critical government instrument in fostering innovation. However, the landscape may shift dramatically with the proposed unification of the existing two-tier system into a single, streamlined structure, a change that’s stirring anticipation and apprehension in the business community.

The Road So Far: Two Schemes, One Goal

Since 2000, the R&D tax relief system has operated on two levels: the SME scheme, tailored for smaller companies, and the RDEC, designed for their larger counterparts. This bifurcation, while well-intentioned, has grown increasingly complex, pushing the government towards consolidation. The proposed merger, expected as soon as April 1, 2024, is part of a broader effort to simplify the tax relief process, though it raises concerns about businesses’ readiness and its subsequent effect on their R&D strategies.

Balancing Act: Benefits and Drawbacks

The consolidation is not without its trade-offs. The current system’s distinct rules, especially concerning contracted R&D work, mean that the new framework will inherently bring changes, benefitting some while disadvantaging others. Particularly, while some companies might soon find themselves able to claim relief for subcontracted R&D, others, currently eligible under RDEC, will face exclusion, potentially straining existing supply chain dynamics.

The government’s goal is clear: refocus incentives on firms that are central to R&D decision-making, thereby rekindling private sector investment in innovation. Nevertheless, the repercussions for supply chain partners need thorough analysis before giving the unified scheme a definitive go-ahead.

Pursuit of Simplicity: A Complex Path

Ironically, the quest for simplification looks complex. The merger should ideally eliminate existing complications, yet the introduction of an additional rate for “R&D-intensive” SMEs complicates the narrative. This rate, applicable to businesses heavily invested in R&D, operates retrospectively, complicating financial forecasting and strategic planning for companies.

Furthermore, the historical generosity of the SME scheme, acknowledging the financial challenges smaller entities face, suggests a need for a careful recalibration of benefits under the unified system. This recalibration should continue to encourage risk-taking in innovation among SMEs.

Global Vision, Local Restrictions

The new scheme also cements restrictions on overseas R&D expenditures, limiting claims primarily to domestic ventures. This constraint, though offering narrow exemptions, doesn’t account for the global nature of talent acquisition and collaboration, critical aspects of modern R&D endeavours. Such limitations might inadvertently influence companies to relocate their R&D projects, contrary to the policy’s intent.

Stability: The Need of the Hour

R&D investments are long-term commitments. The flurry of changes since March 2021, however, has sown seeds of uncertainty, potentially undermining the relief’s efficacy as an innovation catalyst. Businesses crave a stable environment, and the proposed overhaul must provide this stability to maintain the UK’s appeal as a tech business hub.

It’s crucial, therefore, that the new scheme’s design is robust from the onset, avoiding future amendments. Engaging businesses in this transformation process, understanding their perspectives on what constitutes positive change, is essential for the policy’s success.

Defining the Future of Innovation

The terms “R&D” and “innovation” often intertwine, yet there’s a pressing need to delineate what “research and development” truly encompasses. Modernising this definition can help the UK safeguard its technological advancements, providing a clear guideline for businesses and enabling more precise targeting of government funds.

Navigating the Winds of Change

For UK companies steering through economic storms and international rivalry, the R&D tax relief is a lighthouse. As the nation aspires to be a scientific powerhouse, it’s imperative that the impending single-scheme system listens to and effectively supports the engines of innovation — the businesses themselves.

As the UK government overhauls the tax credit system for Research & Development (R&D), experts insist on stringent regulation for advisors guiding companies through their R&D tax claims, an article in Accountancy Today suggests. This push comes amidst revelations of escalating fraudulent claims, compelling HMRC to redefine its strategy and tighten the reins on claim submissions.

HMRC’s Battle Against R&D Tax Fraud

HMRC (Her Majesty’s Revenue and Customs) is taking decisive steps to curb abuse within the R&D tax credit system, citing a staggering rise in fraudulent claims. Recent findings indicate that nearly one in six claims might be deceitful, a reality that has jolted the authorities into action.

The outcry for reform isn’t just about adjusting the numbers; it involves a complete overhaul of the system. Justine Dignam, from Markel Tax, underscores the urgency for stricter regulations on professional advisors involved in R&D applications. She’s pushing for a system that can weed out the architects of these deceptive claims, ensuring that companies receive legitimate guidance.

Voices of Caution Amid Reform

While there’s a consensus on the need for change, how it should be implemented is up for debate. The Chartered Institute of Taxation (CIOT) has voiced concerns, deeming the current proposals “over ambitious.” They fear these rapid changes could inadvertently hamper the very innovation and growth R&D investments are meant to foster.

Come April 2024, we could see a merged, single scheme for R&D, accentuated by additional tax relief for SMEs (Small and Medium-sized Enterprises). However, David O’Keeffe of the CIOT urges the government to consider a more measured approach to these reforms. He warns that the brisk pace might lead to practical difficulties for both HMRC and taxpayers, resulting in unintended drawbacks.

Dissecting the Scale of Fraud

The real eye-opener was HMRC’s annual report, disclosing a startling surge in erroneous claims and outright fraud within R&D tax relief. The 2020-21 losses were estimated at a whopping £1.13 billion, accounting for 16.7% of claims. This figure dwarfs the previous estimate of £336 million, representing 3.6% of total claims.

Dignam emphasizes that before any new systems are introduced, the rampant fraud must first be addressed. She’s critical of the HMRC’s current approach, which despite an increase in compliance checks and about 300 inspectors on the ground, still hemorrhages over £1 billion in fraudulent R&D claims.

Stuart Brodie of Markel Tax shares similar sentiments, labeling the leap in supposed fraud from 3.6% to 16.7% as a massive admission on HMRC’s part. This trend highlights why the department is intensifying its scrutiny of claims.

The Perilous Path for Claimants

With HMRC’s intensified investigations, companies face heightened risks, especially if they’ve been misguided into filing dubious claims. According to Dignam, this predicament not only jeopardizes their standing if probed but also burdens genuine claimants who’ll now have to endure rigorous checks. This atmosphere of distrust may even discourage rightful claims in the future.

A Clarion Call for Advisor Regulation

At the heart of this maelstrom is the regulation of advisors, seen as a pivotal move in eradicating fraudulent R&D claims. Dignam advocates for the registration and regulation of R&D consultants to enforce a standard of proficiency and expertise. This step, she believes, is a rational measure in confronting one of the primary sources of fraudulent claims.

In 2021, the UK’s coffers may have been lighter by nearly £2 billion, a sum that could have been collected from big tech firms had they not shifted their profits overseas. This claim has been put forward by campaigners advocating for a more transparent and fair tax system.

The Big Seven’s Tax Puzzle

TaxWatch, a campaign group focused on tax transparency, has highlighted how seven colossal tech companies from the US, namely Apple, Microsoft, Alphabet (Google’s parent company), Amazon, Meta (formerly Facebook), Cisco, and Adobe, paid significantly less in UK corporation tax and digital sales tax than what appears due, considering their economic activity in the country.

These corporations, some of the largest globally, have intricate international structures that often lead to profits being declared in countries other than where the actual sales are made. This complexity clouds the actual tax these companies should owe the UK, raising questions about the fairness of their tax contributions relative to their operations in the country.

TaxWatch’s analysis estimates that these tech behemoths raked in revenues of £60.5 billion in the UK in the 2021 tax year. By applying their global profit margins, the estimated profits from these revenues would be £14.8 billion. If taxed at the UK’s 19% rate, these profits translate to a potential tax bill of £2.8 billion. However, based on what these companies’ UK subsidiaries have paid, TaxWatch found they contributed only around £753 million in UK corporation tax and digital services tax. This discrepancy suggests a staggering £2 billion less in tax revenue for the UK.

It’s crucial to note that there is no indication these companies engaged in illegal tax evasion. Nonetheless, the gap points to the broader issue of how current international tax rules allow profits — and therefore taxes — to be moved away from where sales are made.

A Closer Look at the Numbers

While TaxWatch acknowledges that its figures are rough estimates, owing to limited data availability in public reports, it stresses that this very lack of transparency necessitates reforms like country-by-country tax reporting. Amazon has contested TaxWatch’s methodology, deeming the assumptions as incorrect, particularly regarding profitability. However, the campaign group maintains that their approach likely presents a more accurate picture of the profits these companies make from their UK operations.

All companies involved have affirmed their compliance with the relevant tax laws. An illustrative case is Microsoft’s UK outfit, which recently settled a tax discrepancy by paying £136 million in additional taxes for previous years after a review by HM Revenue and Customs.

Calling for Change

Claire Ralph, director of TaxWatch, emphasized the need for more clarity in how much tax big multinationals are paying in the UK. She cited Microsoft’s case as an example of how complex international tax rules can be manipulated to shift profits outside the UK tax net, thus depriving the Treasury of significant revenue.

The campaign group’s call for reform is echoed by its founder, Julian Richer, who initiated TaxWatch in 2018 out of frustration with the UK’s inefficient corporate tax system.

Steps Towards Reform

In response to such issues, some measures have been introduced. For instance, the UK implemented a digital sales tax in April 2020, mandating social media platforms, search engines, and online marketplaces to pay a tax amounting to 2% of their revenues — as opposed to profits — if their UK turnover surpasses £25 million.

On the international stage, the Organisation for Economic Cooperation and Development (OECD) members are expected to enforce a 15% minimum tax on corporate profits starting next year. This global agreement aims to discourage profit-shifting, although its actualization remains uncertain.

Several companies have expressed their support for these initiatives. Microsoft endorses a global tax approach preventing market distortions and double taxation. Meta acknowledges public concerns regarding how multinational companies are taxed and supports OECD’s efforts. Adobe asserts its adherence to the tax laws of every country it operates in, while Amazon refutes TaxWatch’s findings as being based on inaccurate assumptions.

The Way Forward

The conversation around the taxation of multinational companies, especially big tech, is complex and ongoing. While these corporations assert their compliance with existing laws, there’s a growing consensus among the public and organizations like TaxWatch that current regulations allow for significant disparities in where and how much tax these companies pay. The steps taken by the UK government and international bodies like the OECD signal a move towards a more equitable tax system, but the journey ahead requires robust dialogue, transparent reporting, and international cooperation.

Microsoft, the tech behemoth known worldwide for its software services, has coughed up £136 million to the UK’s tax authorities. This settlement comes amidst a raging contention over a colossal tax bill back in the United States.

A Settlement Across the Pond

In the past 15 months, Microsoft has settled its accounts with Her Majesty’s Revenue and Customs (HMRC), the UK’s tax, payments, and customs authority, by paying a whopping £136 million. This back tax payment is part of a “bilateral agreement” and follows discussions over the tech giant’s revenue arrangements abroad.

This agreement was reached following scrutiny of Microsoft’s transfer pricing methods — a common strategy used by multinational companies for financial transactions between different divisions of the company situated in different countries.

The Eye of a Bigger Storm

While Microsoft settles its dues in the UK, it’s grappling with a much larger tax demand from the US Internal Revenue Service (IRS). The IRS is gunning for $28.9 billion (£23.6 billion), a sum that pertains to the company’s accounting tactics going back nearly 20 years.

On the last Wednesday of September, the IRS upped the ante on what is shaping up to be one of the most substantial corporate tax disputes in history. Microsoft, however, is not taking this lying down and has voiced its intention to challenge this claim.

Transfer Pricing: A Thorny Issue

Transfer pricing, central to both the HMRC settlement and the ongoing IRS dispute, is a practice often under the scanner. It involves payments between a company’s subsidiaries in different countries and is a legal business activity. However, it’s often criticized for its potential to allow funds to flow into tax havens, thereby reducing a company’s tax liability in their home countries.

In recent years, HMRC has been like a dog with a bone, investigating these transactions and recovering billions in tax revenues as a result. In line with this, Microsoft’s latest UK financial disclosures reveal an agreement with HMRC on recalculating transfer pricing, which led to the £136 million payment to align previous years’ payments with the new terms.

Microsoft’s Stance

In response to these developments, a Microsoft spokesperson emphasized the company’s compliance with the laws and regulations of each country in which it operates. They highlighted that their tax structure is a reflection of their global operations. The additional charge in the UK was described as a one-time adjustment, consistent with the newly agreed bilateral advance pricing terms.

These agreements, usually involving the tax authorities of two countries, are meant to provide predictability to multinational companies. They spell out the tax obligations in both jurisdictions, preventing double taxation and reducing tax evasion opportunities.

The IRS’s Big Claim

Meanwhile, in the US, the IRS’s claim of $28.9 billion hinges on Microsoft’s accounting practices from 2004 to 2013. The bone of contention is the company’s strategy of housing intellectual property in jurisdictions known for their low-tax advantages.

Microsoft doesn’t deny the tax planning strategies but argues for a significant reduction — by $10 billion — in the owed taxes. This claim is based on the tax breaks introduced during Donald Trump’s presidency. They’ve vowed to “vigorously contest” the IRS’s demands, even if it means going to court.

HMRC’s Silent Vigil

HMRC, while not commenting on individual cases, has reiterated its commitment to ensuring everyone pays their fair share under UK law. Their spokesperson stressed the ongoing efforts to challenge multinational corporations on due taxes, claiming successes to the tune of over £6 billion in the past four years, specifically from scrutinizing transfer pricing arrangements.

Global Tax Reforms on the Horizon

In related global tax news, the Organisation for Economic Co-operation and Development (OECD) is making strides toward ensuring multinationals cough up more in corporate taxes. Just this week, they released a draft of a treaty proposing a standardized minimum corporate tax rate of 15% across its member countries. This move could significantly alter the tax planning strategies of multinational companies around the world.

In a nutshell, while Microsoft has settled its tax affairs in the UK, it’s gearing up for a rigorous battle in the US. All eyes are on these developments, which are unfolding against a backdrop of intensifying global discussions around fair taxation for multinational corporations.

Substantial changes to the processes surrounding requests for tax reliefs on Research & Development (R&D) expenses might invalidate a substantial number of these claims. These concerns were shared by Chris Dale, a Partner at Azets, a leading business advisory firm.

Since 8th August, when these new rules came into play, almost half the companies have had their claims rejected by the HM Revenue and Customs (HMRC), signalling the aggressive implementation of the previously announced compliance guidelines to R&D tax relief claims.

Effects of the New Documentation Requirement

This change will inevitably make its presence felt among small and medium-sized enterprises (SMEs). Especially those which are on the innovative frontier and gearing up for the completion of their year-end accounts that extend past the beginning of April 2023, when the rates for the R&D tax reliefs will have dropped.

To accompany the recent compliance changes, a few days past the 8th of August, HMRC introduced newly mandatory digital information forms that need to be submitted with the R&D claims. These forms have proven challenging for nearly half the companies submitting their claims.

Invalid claim letters will soon inundate the postboxes of companies that failed to comply with the new forms. For those firms that have procrastinated with their submissions, this could potentially mean a lost claim.

As of now, no details have been provided about the number of companies that have faced the brunt of claim rejection between 8th August and 30th September. However, given the total of 89,300 R&D claims in the UK for the tax year of 2020-21, one could anticipate that this figure runs into the thousands.

Why Change the Submission Requirements?

This shakeup in administrative regulations primarily aims at weeding out fallacious and fraudulent R&D claims.

To strengthen its efforts against malpractice, HMRC, starting from August, mandated businesses wishing to submit R&D tax relief claims to provide an ample amount of additional information. This now includes detailed descriptions of the R&D work, the breakdown of costs across qualifying categories, the naming of any assisting agent or advisor, and even an endorsement from a prominent officer of the business.

The past few years have seen a surge in HMRC investigations pertaining to R&D tax relief error and fraud. This rise has been in response to the growing number of unregulated R&D tax consultancies and the added weight of R&D tax credits on Treasury’s shoulders, post Brexit implementation.

In the tax year 2020-21, the total estimate for errors and fraud across both R&D tax relief schemes – the SME and R&D expenditure credit, which span all sectors of the economy, amounted to an astounding £1.13bn. This accounts for around 16.7% of all claims, a number which alarmingly exceeds HMRC’s earlier published estimate of 3.6%.

In better news, the latest HMRC data point towards an upsurge in qualifying R&D expenses carried out by UK companies. The tax year of 2021-22 saw an additional £3.3 billion in expenditure, taking the total amount to £44.1 billion.

Further Changes on the Horizon

Signalling further changes, the Government is considering a revamp of the R&D tax relief regime. This proposition comes on the heels of HMRC’s campaign against malpractice and the public consultation conducted earlier this year.

To summarise, the government proposes:

1. A merger of the two separate schemes – A primary component of the Government’s consultation earlier this year involved introducing a single system of relief, mirroring the current RDEC (large company) scheme. However, there may be two potential exceptions.
2. Larger corporations would be able to claim expenses for qualifying payments to subcontractors, paralleling the current SME scheme. This could benefit some companies within the RDEC scheme by widening the scope of qualifying expenditure.
3. A generous cap on benefits available to companies under the SME scheme is also under consideration, as opposed to the currently restrictive definition adopted by the RDEC scheme. This move could mean higher relief for some companies.

In the face of these changes and adjustments, businesses across the UK need to keep abreast of the tweaks and turns in these policies and ensure their claims are in line with these upgrades to avoid missing out on their due tax reliefs.

Nearly half of the United Kingdom’s businesses have expressed concern about the nation’s tax system, labelling it ‘unfavourable’. These businesses feel that the UK’s current tax regime gives our primary competitors like China an undue edge, the Daily Mail reports.

Manufacturers Seek Major Reform in the Autumn Budget

Leading the charge for this overhaul are the UK’s manufacturers. They wish to see significant reform in the Autumn Budget next month, in a bid to revive the economy and steer it out of the existing sluggishness.

The above conclusion stems from a survey conducted by Make UK, a leading manufacturing group, and RSM, a prominent consulting firm. Their findings point to a widespread lack of confidence in the UK’s current tax and regulatory systems. Of the companies surveyed, almost 44% believe that these systems are not only unfavourable but could be undermining the country’s business competitiveness.

Notably, 28% of the companies perceive the UK’s business environment to fall short when compared to China, while others believe it’s even worse than Germany (26%), the United States (27%), France (23%), and Italy (21%).

A Cry for Simplification and Competitive Corporate Tax System

Firms are pleading for an overhaul, starting first by simplifying the tax structure and regulations. Key among their requests is the need for a competitive corporate tax system and the introduction of tax credits for Research & Development (R&D) activities carried out in the UK.

Tax expert, Dan Neidle, revealed in his recent analysis that companies now pay a higher proportion of their profits in tax to the government, or exchequer, compared to the 1970s.

Figures such as this have led to the UK’s Chancellor, Jeremy Hunt, confirming last week that if given a choice, he would lean towards reducing business taxes over other areas. However, he cautioned that the nation is not currently in a position to entertain that discussion.

‘The Need to Make The System Work for Businesses’

Fhaheen Khan, a key voice from Make UK, encapsulated the sentiment of manufacturers when he said, “Manufacturers are clear that many aspects of the current tax and regulatory system are not fit for purpose and are failing to promote vital investment.”

He continued, “We cannot keep up the current inconsistency in policy if we hope to revitalise the economy and encourage long-term growth. The government must urgently revise the current regime to make it work for businesses.”

Echoing this sentiment, Mike Thornton, RSM’s head of manufacturing, also emphasised the clear correlation between tax, regulation, and economic growth. He pointed out how the current framework is viewed as a burden, placing the UK industry at a disadvantage.

Further Dip in Business Confidence, Output and Hiring Intentions

These calls for reform are echoed in a separate report from advisory firm BDO. Their report warned that business confidence, output, and hiring intentions had all fared poorly in September.

This sentiment was encapsulated by Kaley Crossthwaite, a partner at BDO, who said: “With the threat of a recession, businesses are understandably feeling the pressure. More needs to be done to offer businesses support.”

In light of the ongoing global situation, it seems clear that for UK businesses to meet their potential, and to compete on even footing with their international rivals, addressing these concerns around the nation’s tax system must be high on the agenda. It is essential that the UK Government acknowledges these issues and takes definitive action to foster a more favourable environment for business growth and competitiveness.

The UK government has made no secret of its ambition to make the country a global epicentre for innovation. One of the key tools in its arsenal is research and development (R&D) tax relief. But recent changes to this policy have raised eyebrows and concerns among the business community. With the government set to make pivotal decisions soon, Bloomberg Tax looks at what these changes mean for businesses.

A Year of Changes: The R&D Tax Relief Jigsaw

Over the past year, the government has made several tweaks to its R&D tax relief policies. For businesses, this has meant delays, added complexity, and lingering uncertainty about how best to navigate these incentives. These aren’t just policy jargon. They directly impact budgets and investment plans for numerous companies aiming to pioneer the next big thing.

Come November, the government’s Autumn Statement will shed more light on where R&D tax incentives are headed. But if recent events are any indication, more changes are on the horizon, potentially impacting business budgets by next year.

Unified Scheme: Bridging the Gap between SMEs and Big Corporates

Historically, there were two main R&D tax relief schemes:

1. One for small and medium-sized enterprises (SMEs).
2. The Research and Development Expenditure Credit (RDEC) for larger companies.

The rationale was simple. Financing R&D is typically more expensive for smaller businesses, so they were offered more generous tax relief rates. But last autumn, the government decided to shake things up by increasing RDEC rates and subsequently aligning SME rates.

The most significant change on the horizon? The government is considering merging these two schemes. They’ve already provided a sneak peek of what this could look like via draft legislation. While a final decision is pending and will coincide with the Autumn Statement, this merged scheme could be up and running as soon as April 2024.

The R&D Supply Chain Puzzle

Merging the schemes isn’t as straightforward as it might sound. There’s a complex web of rules determining which company in a supply chain can claim R&D relief and under what scheme. The aim is to ensure the relief encourages more R&D investment and doesn’t just become a box-ticking exercise.

The main challenge is distinguishing between contracted-out R&D and R&D done while providing regular goods and services. HM Revenue & Customs (HMRC) recently adopted a wide-reaching view on what falls under contracted-out R&D, causing disputes and uncertainties, especially for SMEs.

The merging of the schemes must address this ambiguity. If not, the uncertainty plaguing SMEs could expand to all businesses, risking the very aim of the incentive.

Defining ‘R&D-Intensive’ SMEs

The merging proposal has a twist. While a single scheme was proposed for all R&D expenses, the government might still retain the current SME R&D tax relief for companies termed as “R&D intensive”. These are SMEs that have a significant portion of their expenses devoted to R&D.

The challenge? The current criteria – where 40% of total expenses must be R&D-related – is quite steep. This means even businesses heavily invested in R&D projects might miss out.

Given the government’s aim to support innovation, they’ll need to take a more inclusive view when defining what “R&D-intensive” truly means.

The Road Ahead: Time is of the Essence

The unified R&D tax relief scheme is undeniably a move towards simplification. But with a potential rollout as soon as April 2024, businesses might find themselves racing against time to adjust their plans.

Innovation is at the heart of economic progress. As the government pushes to establish the UK as a science superpower, businesses eagerly await clear, thoughtful policies that support their innovative efforts.

As the UK navigates its way through choppy post-COVID waters, an interesting trend has been noted in the country’s corporate spending habits. For the tax year of 2021-22, there has been a marked increase in what companies are spending on innovation. This wave of increased investment has led to a corresponding rise in the tax relief that UK companies are able to claim, Director of Finance reports.

Rise in Innovation Investment

Recent figures courtesy of HM Revenue & Customs (HMRC) revealed that during the 2021-22 tax year, businesses in the UK significantly increased their innovation investment. An impressive total of £7.6 billion was claimed in tax relief, a rise of 11% from the previous tax year, during which investment had understandably fallen due to the ongoing global pandemic.

Increased Research and Development Claims

With the surge in innovation spending, HMRC’s provisional figures indicate that the overall number of R&D tax credit claims rose accordingly. During the 2021-22 tax year, HMRC received a total of 90,315 R&D tax credit claims, which was 5% higher than the preceding year.

Contribution by the SME and RDEC Schemes

The R&D schemes for Small and Medium-Sized Enterprises (SMEs) and Research and Development Expenditure Credit (RDEC) have played a fundamental role in driving this increase. Both schemes have seen a substantial rise in claims. The average value of each claim was recorded at £84,150, marking a 6% increase from the previous year. This spike was primarily due to an average increase of 9% in the SME scheme.

Research and Development Expenditure

The mushrooming claims correspond with £44.1 billion of R&D expenditure. UK companies spent an additional 8% on R&D compared to the previous year, expressing their commitment to innovation-focused initiatives.

A Setback for First-Time SME Scheme Applicants

A continuous decline in first-time applications to the SME scheme has been noted over the years, reaching its peak in 2018-19. The anticipation is this trend may continue due to new legislative changes that have recently come into effect.

A Boost for Larger Companies

On the flip side, larger companies subscribing to the RDEC scheme for the first time have seen a swell in applications. For the 2021-22 tax year, the number of first-time applicants climbed by 14%, with a total of 2,705 applications submitted.

London and South-East UK Dominate Claim Figures

Interestingly, the distribution of claim figures isn’t homogenous over the UK. Most of the claims originate from companies with offices registered in London, accounting for 22% of total claims and 32% of the total amount claimed. South East-registered offices are responsible for 15% of total claims and 18% of the total amount claimed.

Stride in Information & Communication Sector

In terms of industry sectors, Information & Communication, Manufacturing, and the Professional, Scientific & Technical sectors lead the way. Collectively, they make up 62% of total claims and 67% of the total amount claimed for the 2021-22 tax year.

What the Experts Say

Visiativ Tax Director Douglas Reid commented on the provisional figures and expressed optimism about the definitive ones. He remarked, “They show a significant increase of 8% on R&D investment by UK companies which spent over £44 billion on innovation-focused activities. The continued decline in first-time applicants to the SME scheme is noted. However, I am encouraged to see a major rise in first-time RDEC applicants. Overall, these are positive figures which highlight how British businesses are recovering from the impact of Covid and ramping up their investment into innovation.”

According to recent findings, British firms are set to face their highest tax burden since the 1940s. Jeremy Hunt has recently emphasised his commitment to reducing taxes that are currently paid by companies. In his eyes, tax cuts for businesses should be prioritised above all else, the Daily Mail reports.

UK Firms and Their Increasing Tax Burden

This proposed policy direction has come from Hunt’s response to an alarming report brought to light by tax expert, Dan Neidle. After conducting an in-depth analysis, Neidle revealed that British companies are now paying more taxes to the government than they did in the 1970s. This surge in taxation has been attributed to the recent increase in corporation tax, which has been raised from 19% to 25%.

Tax Cut Negotiations

News of this growing tax burden for businesses has been met with widespread concern at the Conservative Party conference. Hunt has been subjected to an array of appeals from fellow MPs, who are pushing for tax cuts as a means to stimulate economic growth.

However, despite affirming his dedication to reducing business taxes, Hunt cautioned that the government may not be in a position to advance these discussions at the current time.

The Impact of Corporation Tax Increases

Neidle’s analysis did not stop at alerting us to the rising tax pressures for businesses but also pointed out the repercussions of the recent increase in corporation tax. Although some might argue that a rate of 25% is relatively low – especially when compared with tax rates of the past decades that were as high as 52% – Neidle observes a different picture.

The Plight of Larger Businesses

Neidle also highlights that these corporation tax pressures disproportionately affect larger businesses. This is because, while smaller firms also pay a lower headline rate and usually qualify for more tax breaks, larger companies may not qualify for such measures.

Assessing the current climate, Neidle concluded by saying that while raising the corporate tax may not have been the wisest approach, it was possibly the ‘least of several bad ideas’.

The United Kingdom is often seen as a green champion, leading initiatives in the fight against climate change. A crucial part of this mission has been the shift towards renewable energy sources. However, an important figure from the energy sector has now voiced concerns that the tax environment may be stunting the growth of renewable projects.

The Recent Setback in UK’s Onshore Renewable Contribution

Community Windpower, a prominent green energy firm, has recently had to halt a significant onshore wind project due to increasing financial strains. The issue lies in the increasing tax burden on renewable producers.

Rod Wood, the managing director of Community Windpower, alerted that his company won’t be the last to exit green projects if the current situation persists. He stated that the current levies on renewable producers act as a formidable barrier to investment in the sector.

“We need to incentivise, to attract startups and green businesses here. Look at lower taxes, not higher taxes,” he urged.

The Harsh Realities of Renewable Energy Investment

Renewable power like wind and solar is essential not only for sustainable energy production but also for allied industries such as battery storage and hydrogen. It also holds significant potential for sectors such as artificial intelligence and pharmaceuticals.

However, Wood warned of a potential ‘brain drain’ to rival markets such as the US and the European Union if the investment conditions worsened. These regions have more supportive subsidy arrangements for low carbon energy and technology, which could prove attractive to the local talent.

The United States’ ‘Inflation Reduction Act’ introduced last year, offering over £300bn in green investment for domestic projects, serves as a clear example. Similarly, the European Union’s more robust green initiatives make these regions more attractive for new projects.

The Cost of Inaction and Competitive Risks

“All the graduates from the UK’s best universities will be looking to work abroad because the new tech startups and industries will not be here,” Wood highlighted, signifying the possible talent exodus to overseas markets due to unsupportive investment conditions.

Community Windpower’s decision follows last month’s event, where it had to hold off investment plans for a major onshore wind farm in Scotland, which would have powered 350,000 homes and would have been the fourth largest in the UK. This project was abandoned due to a sudden 80% increase in costs from £300m to £550m due to inflation and a new tax on renewable generators.

Facing the Challenges: Inflation and the Electricity Generator Levy

Currently, the UK is grappling with a stubborn inflation rate of 6.1%, peaking well above 10% earlier this year. This inflation rate is putting significant pressure on renewable generators.

Adding to the burden, a 45% levy has been imposed on the sale of wholesale electricity from renewable and nuclear producers on companies still operating on legacy contracts. Named the Electricity Generator Levy, this additional cost comes into play if receipts are in excess of £75 per megawatt hour. This new levy, introduced last November, is expected to continue until March 2028.

Wood has criticised this regime, calling it a “full blockage” for new projects with no real reflection of what’s happening in global markets.

Observing the Ripple Effects

This climate of uncertainty is adding to growing concerns over the UK’s investment climate. The chill winds were felt after Swedish developer Vattenfall suspended a development off the Norfolk coast in July due to a cost spike of 40%.

Additionally, the recent allocation round for offshore wind projects saw no major bids for new sites – a disappointing outcome. A major reason behind this shortfall was the proposed reforms; industry leaders argued that these were insufficient to reignite the developments after an eight-year de facto moratorium on projects.

Government’s Response

When approached for a reaction, a government spokesperson affirmed that the Electricity Generator Levy was a temporary measure responding to unforeseen and exceptional geopolitical events, with an end date set for 31 March 2028.

They affirmed that the alleged impact on generators’ incentive to invest has been reduced by setting the benchmark price at a relatively high level. They added that the levy is helping to fund the cost of living support for millions of families and businesses.