AB17: Increase in R&D credit is boost for innovation | KPMG | UK

Autumn Budget 2017: Increase in Research and Development credit is boost for innovation

AB17: Increase in R&D credit is boost for innovation

An increase in the credit means the UK Government will fund circa 10% of R&D expenditure.

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An increase in the Research and Development Expenditure Credit (RDEC) to 12% will be a welcome surprise to the UK’s innovative businesses. It comes in addition to the Prime Minister’s announcement of a further £2.3 billion in Research and Development (R&D) funding earlier this week.

The RDEC (recognised in a company’s accounts as income) plays a key role in ensuring global businesses choose the UK as a location for their R&D. It will be available for expenditure incurred on or after 1 January 2018. Raising the net funding from this credit to circa 10% will send a very positive signal to business that the UK Government wants to encourage them to invest even more here.

The circa 10% net funding will be available when the corporation tax rate reduces to 17%. Confirmation in the Budget that this reduction in the main rate will still happen (following some speculation that it might be put on hold) will, in addition, provide certainty for those increasing their investment in UK R&D.

Investment in innovation is key to increasing productivity and ensuring the UK has advanced products and services to allow it to compete in a global market, particularly following Brexit. The Chancellor seems to have quite rightly recognised this, with a vision for the UK to be a “hub of enterprise and innovation”. Recently released figures from the Office for National Statistics show that, whilst business investment in R&D has been increasing, Government support has been falling and fell by 5% in 2016. There is still a long way to go to achieve the Prime Minister’s ambition to raise the level of investment in R&D in the UK to 2.4% of GDP by 2027, so this increased investment, which will benefit businesses across all sectors, is needed.

Further details of the £2.3 billion grant funding announced earlier this week are expected in the Industrial Strategy white paper to be published on 27 November. Areas expected to benefit are artificial intelligence, driverless cars and life sciences.

In addition to the increased funding, the Government has announced a pilot of a new Advanced Clearance service for businesses claiming the RDEC, providing agreement of R&D claims for up to three years prior to filing. This proposal appears to be the result of an informal consultation with businesses on how to improve the level of certainty of the value of RDEC funding. Pressure on HMRC resources and frequent changes in personnel have meant that getting agreement to R&D claims and payment of the cash credit has become increasingly more difficult. Being able to agree a methodology for making a claim for a three year period is likely to improve this situation significantly.

One group of businesses that might be left feeling disappointed are Small and Medium Sized Enterprises (SMEs). There is a different R&D tax incentive regime for SMEs and therefore no increase in funding available from HMRC. The Government has announced that a campaign will be launched to increase awareness of R&D tax credits for SMEs with the aim of removing barriers to making a claim. This may be little consolation for those that are already making claims.

For more details, please contact:

Carol Johnson
T : +44 (0)20 7311 5629
E : carol.johnson@kpmg.co.uk

David Woodward
T : +44 (0)20 7694 4171
E : david.woodward@kpmg.co.uk

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