Wednesday 12 July 2023

Corporation Tax Incentives — Reasons to invest in the UK

Original post by HW Fisher.

Aside from the ease of establishing a business presence in the UK, there are generous tax incentives available for innovative businesses, which can reduce the already low corporation tax rates further.

Research and Development (“R&D”)

There are two regimes providing Corporation Tax relief for those companies that undertake qualifying R&D activities in the UK. The rules set out below apply to R&D expenditure incurred after 1 April 2023.

  • The Small and Medium-sized Enterprise (“SME”) scheme applies to companies which have less than 500 employees and either turnover of less than €100m or a balance sheet total of less than €86m. These limits apply to the consolidated worldwide group results where the company is a member of a group.

An SME is entitled to claim an enhanced Corporation Tax deduction equal to 186% of its qualifying expenditure on R&D. This can substantially reduce the company’s taxable profits, making the cost of undertaking R&D work in the UK highly competitive.

Additionally, where the enhanced Corporation Tax deduction results in the company incurring a tax loss, the company can elect to surrender the loss in exchange for a cash payment from HMRC. The cash payment is currently equal to 18.6p for every £1 actually spent by the company. It should be noted that this is a lower return than offsetting the losses against future taxable profits but does provide a cashflow advantage.

  • The Research and Development Expenditure Credit (RDEC) scheme applies to any company that does not qualify for the SME scheme.

The RDEC tax credit, which will be taxable, will be a payable cash sum equal to 20% of the company’s qualifying expenditure on R&D; this will result in a rate of post-tax relief of 15%.

For profit making companies the credit discharges Corporation Tax liability that the company would have to pay. Companies with no Corporation Tax liability will benefit from the RDEC either through a cash payment or a reduction of tax or other duties due.

Overall, the UK R&D tax relief schemes are highly generous and increase the attractiveness of the UK for inward investors.

Patent Box

The current UK Patent box regime was introduced in April 2013: companies can elect into the regime which will result in income directly attributable to the exploitation of patents being subject to a 10% Corporation Tax rate.

The relief applies to income derived from patents registered in the UK or Europe.

There are a number of conditions to be met such as requirements that the UK company either owns the patent or has an exclusive licence to exploit the patent, and has been actively involved in developing the patent.

There are restrictions based on the proportion of relevant UK R&D undertaken as a proportion of global R&D.

HW Fisher advises many Australian companies and Australian citizens who have taken up employment here. To discuss specific circumstances, please get in touch with Gerry Myton, HW Fisher Tax Partner.

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