George Osborne has made a major improvement to the UK's tax environment for R&D today by announcing in his Autumn Statement that the R&D tax credit will become payable ‘above the line' from 2013/14.
This reform will increase investment from companies already the UK as well as bring additional investment in R&D to the UK.
The change means that rather than large firms accounting for the R&D tax credit in their tax return ‘below the line', the benefit will be accounted for upfront in R&D budgeting ‘above the line'.
The key benefits of moving to an above the line credit are:
• Creating a simpler system;• Strengthening the link between the R&D tax credit incentive and the parts of companies where investment decisions on R&D are made;• Increasing certainty around the timing of the benefit of the R&D credit by decoupling it from a company's tax profile.
Innovation is crucial for keeping ahead of the competition, generating better balanced growth, and creating high-value jobs.
When the R&D tax credit system was introduced it was a positive development for the UK. But our competitors do not stand still. Many countries have sought to incentivise greater expenditure on innovation and attract mobile R&D investments by introducing reforms to their own schemes to increase the incentive effect.
Today Mr Osborne has responded. He has made clear that the ambition he stated in March, to make the UK ‘the most competitive tax environment in the G20' means the whole tax system, not just the headline rate. This is welcome news because it corresponds to how companies see the impact of taxes.
PwC has conservatively estimated this reform would deliver £665 million per annum of additional value to the economy at a net cost to the Exchequer of £205 million per annum. These are meaningful numbers at a time when the UK must be doing all it can to support growth.