Earlier this evening – or yesterday, if you're disciplined enough to avoid checking your email late in the evening – a debate took place at the Chartered Institute of Taxation on whether business tax reliefs are corporate welfare or essential elements of the tax system.
It’s easy to be critical of the business tax system. It’s easy because it's a behemoth requiring simplification (broadening the base) and cuts. But not all interventions are equally bad; and some might even be good! For example, as Helen Miller of the Institute for Fiscal Studies pointed out, the evidence suggests there are decent arguments in favour of Research & Development (R&D) Tax Credits.
The economic justification for the policy is that it can produce spillovers – in other words, positive stuff that wouldn’t otherwise happen and enough of it so this outweighs the economic cost of lost tax revenue. Evaluations show that £1 of R&D relief results in £1.7 of R&D, as well as other positive externalities on innovation. (Over the years, I've seen a lot of evidence backing this up – more than I've found for any other tax break.)
The government doesn’t do a great job of promoting its policies. The experience of Charlie Mowat (p. 44), founder of The Clean Space, is typical:
“We just stumbled across R&D tax credits – I was at a conference and there was a guy who was pitching as an accountant to see if anyone was interested in help claiming for R&D. We found that we qualified, so we submitted an application and we went from there. It’s had a massive impact in terms of allowing us to invest more in the system but the government should be advertising it better. We found out in time to make the most of it for this project, but we did miss out on previous projects which we could have claimed on, and which we spent around £200 thousand on developing. Entrepreneurs just don’t know enough about it.”
For any entrepreneurs not yet up-to-speed on R&D Tax Credits, here are the basics (taken from the Gov.uk website).
R&D Tax reliefs support companies that work on innovative projects in science and technology. It can be claimed by a range of companies that seek to research or develop an advance in their field. Specifically, companies that:
- looked for an advance in science and technology;
- had to overcome uncertainty;
- tried to overcome this uncertainty
- couldn’t be easily worked out by a professional in the field.
There are two types of relief, but the one for SMEs – that is, companies with under 500 employees, and a turnover of under €100m or a balance sheet total under €86m – allows companies to deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction. Also, you can claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss.
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