Perspectives

Innovation Impacts

Autumn Statement 2016

The government is aiming to invest heavily in UK R&D to boost productivity and drive economic growth.

Increased investment into R&D

The government has committed to investment of an additional £4.7 billion over the next four years into R&D funding, which it recognises as being a key driver of economic growth.

The aim of the increased investment is to enhance productivity which is recognised as being weak in the UK compared to other countries such as Germany, France and Italy, which were specifically mentioned in the Chancellor’s speech.

We welcome the overall aim to ensure that the next generation of discoveries is made, developed and produced in Britain.

Funding

The government will introduce two new funds: the ‘Industrial Strategy Challenge Fund’ and ‘Innovation, applied science and research’, both to be predominantly led and managed by Innovate UK. This funding will enable the UK to retain its position as a global leader in the fields of science and technology, with particular focus on key areas such as blockchain and artificial intelligence. We also note that there will be increased investment and guidance for FinTech, for which the UK is already recognised as a global leader, and supports the government’s ambitions to maintain and build on its capabilities across industries.

A large number of R&D intensive companies begin life as small start-up businesses who identify the availability of funds as one of their core business issues. We therefore welcome the additional £400m of investment to be routed into venture capital funds to provide help to innovative companies that are planning to scale up.

Whilst the investment into the Biomedical Catalyst has already been announced, it represents another significant increase in the budget for Innovate UK.

Overall, it is very positive that the government is putting in place funding sources, at a time when both businesses and universities have expressed concern that EU funding may no longer be available following the UK’s departure from the EU.

Review of existing R&D tax incentives

The introduction of the R&D Expenditure Credit (RDEC) in April 2013 has been well received by large companies due to the ability to recognise the tax credit above the line and the availability of a cash credit for non-tax paying companies. As the corporation tax rate decreases to 17% over the coming years, the credit will become even more valuable to large companies investing in R&D.

A review of R&D tax incentives will be conducted by the government to build on the success of the RDEC, with more details on the review expected in the new year. We welcome such a review, however we note that whilst it is good to build on the success of the RDEC, there is a need to balance any enhancements with the simplicity of the R&D regimes to ensure that smaller companies can continue to claim for the incentives to which they are entitled. On that note, we note that simplified guidance on R&D has now been released, and we look forward to this direction being continued.
One change we would recommend as part of the review process would be the removal of the restriction for capital expenditure from the R&D tax incentive regimes. Companies are incurring spend within the qualifying cost categories on innovative R&D activities but may be precluded from claiming R&D incentives due to the accounting treatment of the underlying costs. We consider that this may not be supporting the full lifecycle of the R&D and may limit relief available for many significant R&D projects, including those involving productivity enhancing technologies.

Patent Box: Nexus Regime updates

The government has been working to incorporate the changes required as a result of the OECD’s work on BEPS Action 5: Harmful Tax Practices, which requires implementation of a Nexus approach to the Patent Box regime. The bulk of the changes were substantively enacted on 15 September 2016 as part of Finance Bill 2016 and came into effect as at 1 July 2016, when the current Patent Box regime closed to new entrants. Grandfathering provisions are available until 30 June 2021.

The government confirmed today that it will bring in specific provisions as part of Finance Bill 2017 to cover how these changes will apply to companies within a ‘cost sharing arrangement’. The intention of these provisions is to ensure that companies within a ‘cost sharing arrangement’ are neither advantaged nor disadvantaged under the Nexus regime. It is worth noting that whilst all other changes to the Patent Box regime come into effect from 1 July 2016, the changes specifically covering ‘cost sharing arrangements’ will only come into effect for accounting periods commencing on or after 1 April 2017.

The draft legislation is to be published on 5 December 2016.

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