A recent analysis of Foreign Direct Investment (FDI) projects during 2022 saw the UK perform strongly in Research and Development (R&D) compared to their European counterparts.
R&D FDI projects in the UK had risen in 2022 by 14.4 per cent. 127 projects in total were recorded, second only to France on 144 who were only up by 8.3 per cent.
Additionally, 53.8 per cent of surveyed investors plan to increase their UK R&D investments in the next three years.
It is worth noting that the UK led Europe on pharmaceutical and medical devices R&D centres, with almost double the number of projects than second-placed France.
With R&D projects on the rise, it is important to know of the significant tax reliefs that are available in the UK for businesses with sights on R&D tasks in the near future.
The UK Government has long encouraged businesses to invest in R&D projects, believing it to be at the forefront of economic growth.
R&D tax reliefs are therefore lucrative and aimed at both Small and Medium Sized Enterprises (SMEs) and larger organisations.
R&D tax relief for SMEs
The Government allows SMEs working on R&D projects to deduct an extra 86 per cent of their qualifying costs from their yearly profit for Corporation Tax purposes.
This is on top of their normal 100 per cent deduction, so a total 186 per cent deduction can be made.
SMEs are also able to claim a payable tax credit if the company has claimed relief and made a loss, the payable credit is worth up to 10 per cent of the surrenderable loss for most businesses, although R&D-intensive businesses (those that spend 40+ per cent on R&D expenditure) qualifying for an enhanced rate of 14.5 per cent.
The Government defines an SME as a business with less than 500 staff and a turnover of under 100 million euros.
However, the R&D projects must be in the fields of science and technology.
R&D Expenditure Credit (RDEC)
RDEC is a similar tax relief but is geared towards larger corporations, however, SMEs can claim RDEC if they cannot claim R&D tax relief for small and medium-sized enterprises.
As of 1 April 2023, companies can be offered credit worth 20 per cent of their qualifying R&D expenditure.
The RDEC is taxable, but it can be used to offset the corporation tax bill, or claimed as a cash payment, providing significant financial relief for companies undertaking R&D.
Patent Box
The Patent Box scheme allows businesses to apply a lower rate of Corporation Tax (10 per cent) to profits earned from their patented inventions and certain other intellectual property.
The Patent Box is designed to incentivise businesses to maintain and commercialise their patents and IP within the UK.
Capital Allowances
Businesses can also benefit from capital allowances on R&D. Capital expenditure on R&D can qualify for a 100% first-year allowance.
This means that businesses can deduct the full cost of these assets from their profits before tax in the year they make the purchase.
This can include expenditure on items like equipment, machinery, and even some types of buildings.
The tax relief system for R&D projects in the UK is advantageous for businesses and is a clear sign the Government sees this area as a point of economic growth.
If you’d like more information about R&D tax relief for your business, please contact us.