As You Were!
To say that we have gone through a period of uncertainty recently would be putting it mildly – two monarchs, three prime ministers and four chancellors in the last few months coupled with rising inflation, interest rates and a weaker pound. The collective impacts have created chaos in the UK economy.
Sandwiched in the midst of the chaos was a mini-budget which included a reduction in the basic rate of income tax, the abolition of the higher rate of income tax and a proposed delay to the increase in corporation tax scheduled for next April. Following widespread condemnation of these plans, all of these decisions have since been reversed, and we are back to where we were a few short months ago!
The corporation tax U-turn means that the main rate will increase next year for the first time since 1973. It also means that we will have multiple rates of corporation tax for the first time in eight years, bringing marginal relief back into the equation. Claimants of research and development tax relief, patent box tax relief and capital allowances will therefore see a change in the value of relief from April 2023, presuming that there are no further changes announced by whoever next spring’s Chancellor may be!
Research and Development Tax Relief
Currently, profitable claimants of R&D tax relief under the SME scheme receive an additional 24.7p of tax relief for every £1 spent, on top of the 19p of corporation tax relief already given on such expenditure. This will still be the case for profits relieved below a level of £50,000, but for profits exceeding £250,000 companies will receive 57.5p of tax relief per £1 spent (25p main rate plus 32.5p in enhanced expenditure). Between these two levels, marginal tax relief is even higher at 60.95p of relief per £1 spent (26.5p main rate and 34.45p enhanced).
Loss making SMEs will not be affected by the corporation tax rate changes, but large companies claiming under the RDEC (Research and Development Expenditure Credit) scheme will actually be worse off with the incoming changes. This is because the credit received (currently 13p for every £1 spent on qualifying research and development) is taxed at the main rate, meaning the net benefit from April will fall from 10.53% to 9.75%.
Patent Box Tax Relief
Patent box tax relief is an interesting area; the scheme has not changed since 2016 when new rules were introduced to address avoidance through global profit shifting. Assuming no further changes in the spring budget, companies that pay corporation tax against profits made on products, processes and services protected by qualifying intellectual property such as UK and EU-granted patents, will pay a flat tax rate of 10% on these profits. This equates to a saving of 9p per £1 of profits made up to £50,000, 15p per £1 of profit made over £250,000 and 16.5p per £1 of profits made between these two limits.
Capital Allowances
The Super Deduction rate of 130% meant that qualifying main pool assets attract a tax saving of 24.7p per £1 spent. However, the relief comes to an end on 31st March 2023 coinciding with the increase in corporation tax. From April 2023, plant & machinery expenditure will attract tax savings between 19p and 26.5p in the first year, depending on the profits made, where the AIA (Annual Investment Allowance) is claimed. The limit of the AIA was recently confirmed to remain at £1m going forward. While the Super Deduction is still an attractive relief, the difference is less notable than in the brief window that the increased CT rate was cancelled, for companies who won’t utilise all of their AIA limit.
As with all policy changes, there are some winners and some losers with these proposed rate changes, but you would have to be brave to back there being no further twists or turns before next April – both in terms of the tax rates and who will actually be setting them!
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