UK will amend R&D tax reliefs, increase bank corporate tax rate

By Doug Connolly, MNE Tax

The UK government announced plans to reform tax incentives for research and development (R&D) as part of the 2021 autumn budget and spending review. The budget review also sets out an increase in the corporate tax rate for banks, which will remain higher than that paid by other companies.

The R&D amendments include changes expanding the types of expenditures that qualify, re-focusing the incentives on UK-based activities, and stepping up anti-abuse enforcement.

To “support modern research methods,” qualifying expenditures for R&D relief will be expanded to include cloud computing and data costs. The expansion is a result of earlier consultations on how to improve the R&D incentives, including by expanding the types of expenditures that qualify.  The changes are aimed at “reinforcing the UK’s status as a science superpower.”

The plan also involves “refocusing support towards innovation in the UK.” Unlike the US and several other countries, the UK currently allows companies to apply its R&D incentives to activities that take place outside the country.

“The latest figures show the UK has the second-highest spending on R&D tax reliefs in the OECD,” Chancellor Rishi Sunak said in his budget review speech. “Yet it’s not working as well as it should: UK business investment in R&D is less than half the OECD average.”

Sunak went on to attribute this effectiveness gap in large part to the fact that the UK is “subsidising billions of pounds of R&D that isn’t even happening here in the United Kingdom.” Accordingly, starting April 2023, UK R&D reliefs will “incentivise greater investment here at home.”

There will also be new R&D measures to “target abuse and improve compliance.”

The government plans to release further details later this year.

Bank corporation tax

When the government announced in the spring budget 2021 the coming increase in the general corporate tax rate from 19% to 25% starting in 2023, it further declared its intention to review the bank corporation tax surcharge. The government states that it has now completed that review.

The bank corporation tax surcharge will be set at 3% from April 2023. This will make the combined rate for banks 28%, compared to the general 25% corporate rate. This will mean a one percentage point increase in the current bank rate of 27%.