The research and development (R&D) tax credit system will be reformed in an effort to boost productivity growth, announced Chancellor Rishi Sunak as he delivered his Spring Statement to the House of Commons on Wednesday.
As part of what Sunak dubbed a “new culture of enterprise”, the scheme will be expanded to include data, cloud computing and pure maths.
“Something is not working,” he told UK lawmakers, lamenting that the amount UK businesses spend on R&D as a percentage of GDP is less than half the OECD average.
The Chancellor also noted that a “more generous” R&D expenditure credit scheme would be considered as part of the Autumn budget later this year.
“Moves to make R&D tax relief more generous are welcome, as are changes to the incentive to recognise the important role of data feeds and storage, cloud computing and pure mathematics,” said Jenny Tragner, tax director at R&D tax relief consultancy ForrestBrown.
“[A more generous R&D regime] would further incentivise innovation by UK businesses by making the incentive more globally competitive.”
Similar sentiments were offered by Jon Richardson, tax leader for policy, reputation, regulation and risk at PwC UK, who argued that reform to the R&D regime is urgently needed.
“The UK R&D tax credit regime and tax allowances for capital investment are not generous by international standards,” he said.
“There is a need to do something, otherwise the UK will not be competitive from April 2023 when the super deduction ends and the corporation tax rate increases to 25 percent.”
But the deferment of further measures until Autumn proved to be an overarching theme of the Spring Statement, with few immediate reforms being announced.
“This had less of the feel of a Chancellor responding to crises, and more of one delivering a vision,” said Chris Sanger, head of tax policy at Ernst & Young.
“The question now will be whether the UK economy allows the Chancellor to stick to his course, or whether crises will continue to beset his plans.”
However, today’s changes to the R&D scheme form part of a wider tax plan proposed by the Chancellor, which includes a £3,000 increase to the National Insurance Contributions threshold to align with the income tax allowance of £12,750.
Moreover, the centrepiece of the Chancellor’s address was the announcement that income tax would be cut by 1p in the pound as of 2024. This will be the first time in 16 years that the basic rate of income tax has been cut.
Sunak summarised these measures as a “principled approach to cutting taxes”, noting that they constitute the “biggest net cut to personal taxes in over a quarter of a century”.
But according to Jon Stevens, global deputy head of tax & private capital at DWF, the new tax plan overlooks key flaws in the current system.
“It [the new tax plan] doesn’t feel in line with the Chancellor’s three objectives of helping hard-working families, increasing growth and sharing the profits fairly,” he said.
“The Health and Social Care Levy and the reduction in the basic income tax rate from 2024 favours unearned income over earned income, something that already needs to be addressed in our current system.”
“No cheer for businesses”
Omissions were also highlighted by Toby Ryland, corporate tax partner at HW Fisher, who said the Chancellor’s statement largely neglected businesses during a time of particular financial strain.
“There was little to no cheer for businesses in the Spring Statement today. All the focus is on income tax, but it’s a missed opportunity for businesses that face a looming increase to their tax bill.
“Given the pressure to increase employee salaries immediately, the financial strain on businesses remains acute.”
Ryland also noted that any incentives introduced in the Autumn could be cancelled out by the rise in corporation tax in April 2023, which will jump from 19 percent to 25 percent.
However, the Chancellor went on to announce that from April, employment allowance will increase to £5,000, and promised that tax rates on business investment will be cut as part of the Autumn budget.
He also confirmed the one-year extension of the business rates discount for retail, hospitality, and leisure properties – the relief will grant businesses a 50 percent discount up to the value of £110,000.
“A stronger, more secure economy”
The Chancellor also set the backdrop for his new measures by outlining the current fiscal landscape, noting that the ongoing conflict in Ukraine has resulted in “unusually high uncertainty around the outlook”.
Figures from the Office for National Statistics revealed today that prices rose by 6.2 percent in the 12 months to February (the fastest for 30 years), and Sunak confirmed that the Office for Budget Responsibility anticipates an average of 7.2 percent during the remainder of this year.
He also stated that the UK is forecasted to spend £83bn on debt interest during the next financial year – the highest on record, and four times last year’s amount.
But in spite of his acknowledgement that it’s “too early to know the impact of the Ukraine war on the UK economy”, Sunak confirmed that unemployment is expected to fall during every year of the forecast.
He also said that underlying debt and borrowing as a percentage of GDP is expected to fall in the coming years.
“Today’s Statement builds a stronger, more secure economy for the UK,” he said.