UK proposes ‘super deduction’ for plant and machinery, launches R&D tax incentive review

By Doug Connolly, MNE Tax

The UK published its Finance Bill on March 11, detailing the tax provisions announced in the 2021 UK budget.

The Finance Bill introduces a new first-year “super-deduction” capital allowance for companies investing in qualifying new plant and machinery assets. With the super deduction, companies investing in qualifying assets can reduce their taxable income by 130% of the cost of those investments. The super deduction would be in place for two years, applying to expenditures from April 1, 2021, to March 31, 2023.

UK Chancellor Rishi Sunak called the super deduction “the biggest business tax cut in modern British history.” The deduction is intended to boost economic recovery by spurring business investment. The Office of Budget Responsibility has estimated the provision would boost investment by 10%.

Corporate tax hike

While the Finance Bill includes provisions like the super deduction to boost economic recovery in the near term, in the longer term, it seeks to balance public finances. To this end, it would increase the corporate tax rate to 25% on profits over £250,000 (US$349,000) beginning April 2023.

The current 19% rate would continue to apply to small businesses with profits of £50,000 or less. A tapered rate would apply to companies between the two thresholds. The Chancellor stated that the higher rate would only apply to about 10% of companies, and he claimed that the UK would still have the lowest corporate tax rate among the G7 countries (US, Canada, Italy, Japan, Germany, and France).

R&D tax credit for small and medium enterprises

The Finance Bill includes a new cap on the amount of the R&D tax relief for small and medium enterprises. The cap is set at an amount equal to the sum of £20,000 and three times the company’s total Pay-As-You-Earn (PAYE) and National Insurance Contributions (NIC) liabilities for the period. This amendment is intended to prevent abuse by companies with little or no UK-based employment.

The cap was first proposed in 2018 and has been the subject of previous consultations. The amendment is set to apply to accounting periods beginning on or after April 1, 2021.

R&D tax incentive review

Alongside the budget, the government launched a consultation reviewing the UK’s current R&D tax incentives. The consultation seeks input from stakeholders on an array of issues related to the UK R&D tax incentives with an ultimate goal to increase R&D to 2.4% of UK GDP by 2027.

The consultation seeks views on the two principal UK R&D tax reliefs (the above-the-line R&D Expenditure Credit and the additional R&D tax relief for small and medium enterprises). It asks whether these tax incentives could be improved or consolidated. The consultation further requests comment on whether the incentives’ rates are appropriate and whether there should be changes to the scope of what qualifies for the relief.

The scope of what expenditures qualify for tax relief credits was also addressed in an earlier consultation, the outcome of which was published concurrently with the launch of the new R&D consultation. The consultation outcome document summarizes responses received on the earlier consultation and states that a decision on whether qualifying expenditures will be expanded to include data and cloud computing will be considered as part of the new broader R&D tax review.