In March, Chancellor Rishi Sunak announced the UK Budget for 2021.

With the dramatic economic impact of Covid-19 being felt across all industries, eyes and ears were focused on exactly how the UK Government planned to inspire and nurture a period of economic recovery.

Amongst the plans, Sunak unveiled a series of measures intended to encourage business investment and, most importantly for us, innovation.

The plan recognises the important role innovation plays in industry evolution and business growth, and as a result, a number of these measures will have a direct impact on research and development processes, projects and claims.

What does this mean for your business? Let’s explore...

R&D Tax Reliefs consultation

It’s now been confirmed that the UK Government plans to launch a consultation around R&D tax reliefs.

This is intended to ensure the UK’s research and development scheme remains competitive and up-to-date on the global stage. To do this, it will evaluate both the SME and RDEC branches of the R&D Tax Credits scheme, paying particular attention to stakeholder responses to the nature of private-sector R&D investment.

This will include incorporating data and cloud computing costs into the incentive’s eligibility scope in an effort to ensure contemporary R&D processes are sufficiently supported by the UK schemes.

Closing on 2nd June, 2021, this consultation may have positive implications for any companies utilising data and cloud computing as part of wider eligible innovation practices.

HMRC combatting scheme abuse

The UK Government is also intending to analyse how effectively R&D reliefs are working - not only for businesses, but for HMRC, too.

R&D tax credit has, unfortunately, become a regular target for fraud and intentional system abuse. In reaction to that, new measures have been introduced - first announced in 2018 but brought in on 1st April, 2021 - to ensure relief always goes to those who are entitled to it.

The payable amount of R&D tax credits (loss surrender) an SME can now receive in one year is capped at £20,000, plus 300% of its total pay as you earn (PAYE) and National Insurance contributions (NICs) liability for the same period.

It’s important to note that there are exemptions, including any accounting periods that precede 1st April, 2021. A full list of exemption criteria is available on the UK Government website here.

This won’t affect any loss-making SMEs who want to carry their losses forward, but will affect you if you’re a loss-making SME looking to claim a value of over £20,000.

Deductions and extensions

Whether it’s a reduced demand for products and services or a disruption to supply chains, there’s been a sharp increase in short-term trading losses following the outbreak of Covid-19.

The 2021 Budget included several measures intended to provide an increased cash flow to affected businesses, stimulating investment and inspiring growth.

These included:

130% ‘super-deduction’  

The UK Government announced its intentions to stimulate investments in ‘productivity-enhancing plant and machinery assets’ through the introduction of temporary increased reliefs for the associated costs.

Qualifying expenditure across the temporary two-year window may benefit from:

• • A 130% capital allowance on plant and machinery investments
  • A 50% first-year allowance on plant and machinery investments that also qualify under special rate assets

This significant deduction is made upfront, allowing profit-making businesses to cut their tax by as much as 25p for every £1. To find out more about your eligibility, see here 

Carry-back trading losses extension

The 2021 Finance Bill includes temporary legislation that extends the time period across which trading losses can be carried back against profits of earlier years.

This extension increases the time window from one year to three years, and will apply to trading losses made between 1st April, 2020 and 31st March, 2022.

Applicable to all companies and unincorporated businesses making losses who historically made profits, benefits such as an R&D tax relief claim can be carried back against profits to earn a rebate on Corporation Tax.

Changes to Corporation Tax rates

Changes to Corporation Tax rates are intended to raise revenue while keeping the UK’s rate competitive, relative to that of other major economies.

As of 1st April, 2023, the main rate of Corporation Tax for non-ring-fenced profits over £250,000 will increase to 25%. This will be accompanied by an increase to 19% in small profit rates for companies with profits of £50,000 or less.

Meanwhile, companies with profits falling between the two brackets will pay tax at the main rate, which is then reduced by a marginal relief - find out more here.

This looks set to affect any companies and unincorporated associations paying Corporation Tax, but businesses could look to reduce the impact of this by investing in qualifying R&D activity.

Future Fund: Breakthrough

In his Budget 2021 announcement, Rishi Sunak also introduced Future Fund: Breakthrough, a £375m nationwide scheme devised to encourage private investors to co-invest with the UK Government in high-growth, innovative firms.

Launching in the summer, this fund will look to support the scaling of R&D-intensive businesses across the country, recognising the important role these businesses play. As The British Business Bank (who will provide equity in funding rounds of £20m plus) put it themselves:

“These R&D intensive companies, accelerate the deployment of breakthrough technologies which can transform major industries, develop new medicines, and support the UK transition to a net zero economy”.

The intention is that, through providing more upfront capital for innovative pursuits, the fund can support the faster growth of companies and industries - generating jobs and boosting prosperity in the process.

The UK Infrastructure Bank

Elsewhere in the Budget 2021 announcement, Sunak provided further information on the UK Infrastructure Bank, which is set to replace the European Investment Bank following Brexit.

Launching in the summer, it will fund £12bn of equity and debt capital for private sector and local authority infrastructure projects nationwide. Additionally, it’s able to grant a maximum of £10bn in guarantees and will offer a range of further tools in the pursuit of a “green building revolution”.

A huge driving force in the UK Government’s goal of net-zero carbon emissions by 2050, the bank will primarily make decisions in line with these objectives, with a particular focus on digital infrastructure, transport, clean energy, water and waste.

Of course, this places a great emphasis on innovation, and presents a multitude of research and development opportunities to relevant industries. On that note, the UK Infrastructure Bank will offer the chance for universities to receive R&D funding for qualifying projects - supporting local and regional growth, too.

Summarised...

With the emphasis placed on an investment-led recovery, the 2021 Budget provides an array of opportunities for research and development.

With the points discussed affecting both businesses actively pursuing new R&D projects and those looking to claim back on past projects, it’s key for you to understand how this affects your business, your industry and, most importantly of all, your claims.

With so much changing over the past couple of months, the R&D Tax Credits scheme is not something any eligible business should miss out on. This makes ensuring you’re getting it right the first time vital to maximising your claim.

Get in touch with Lumo to find out how we can help you and your business today.