Figures from the International Tax Review reveal that 33 per cent of business owners are in favour of lower Corporation Tax rates on profits related to R&D projects.
The reasoning behind this call echoes the aims of the R&D tax scheme – to reward and incentivise innovative work across all sectors, freeing up additional resources to invest in new projects.
However, at a time of significant change for the UK tax code, it is important that we stop and take a look at what this could mean for the existing R&D tax system.
Applying the definition of R&D
It is reasonable to assume that any profits subject to a lower rate of Corporation Tax would need to come from work that qualifies as R&D for tax purposes. That is, work that:
- Makes or seeks an advance in the field of science or technology
- Advances the overall knowledge in the field
- Is novel and does not simply apply existing knowledge in a different situation
- Cannot be easily worked out by professionals in the field
That is fairly straightforward. However, qualifying costs are where these proposals become more complex.
Can the rules stand up to change?
For the current R&D tax system to remain as it is, there would need to be separate rules for Corporation Tax and R&D tax credits.
In practice, this means that profit-making activities, such as manufacturing and distribution, would have to be relevant when applying for a lower rate of Corporation Tax.
However, these activities do not currently count as qualifying costs for R&D tax relief or credits.
Under current rules, R&D that qualifies for tax credits or relief stops when a working prototype has been made, and the cost of mass manufacturing and distributing a product or service is not eligible.
Herein lies the conundrum. One measure views R&D as a commercial activity, while the other views it as something to be encouraged as a driver of collective knowledge and advancement.
While it is potentially positive to incentivise R&D on a commercial level, the need for separate rules seems like mixed messaging as to the purpose of the scheme – in addition to being practically confusing for claimants.
The randd uk verdict
Would this be a positive measure for businesses conducting R&D? The financial benefits are potentially there, but more broadly, R&D tax credits alone seem like the more prudent and proven choice.
In an area where compliance is already challenging, not only for businesses but their accountants as well, adding new tax rules around R&D opens the door for significant non-compliance and error.
If the Government were to offer additional support for R&D activities, raising the rate of claimable credits, or the rate of Corporation Tax on credits themselves, would seem a more streamlined option.
For more insight into R&D tax and tailored advice, please don’t hesitate to get in touch with our team.