State of the economy
This week, The Chancellor, Philip Hammond delivered the second budget of 2017 . He announced that the Office of Budget Responsibility (OBR) has forecasted a downgrade for the UK’s economic growth; from 2% to 1.5% in 2017 .
Also revised down were the UK’s productivity growth and business investment. Central themes to the chancellor’s budget include measures to increase productivity and to ensure the UK’s economy is ready for the uncertainties of Brexit.
Other headlines of importance include, public borrowing is forecast to decrease this year, £8.4bn lower than in March and unemployment is at its lowest level since 1975. Tax-free personal allowance to rise to £11,850 in April 2018.
VAT threshold for small businesses is to remain at £85,000 for two years. Significant funds to move towards increasing support for electric cars with over £500m promised. Stamp duty to be abolished immediately for first-time buyers, for properties worth up to £300,000.
Among all the measures, there is a clear trend that emphasises the significance of R&D innovation and its positive role in today’s economy. This is evidenced from key features revealed on public spending and taxation on companies and individuals.
Key information for Leyton’s clients
Corporation tax remains at a rate of 19% until 2020.
R&D Tax Relief
In line with the governments long-term ambition for science and innovation – “increasing R&D investment in the economy to 2.4% of GDP by 2027- the following measures are to be taken:
- R&D expenditure credit (RDEC) is being increased from 11% to 12% permitting large companies and grant funded projects to claim R&D Tax Credits at an increased rate. The increase in the RDEC rate will have effect for expenditure incurred on or after 1 January 2018.
- The Government will pilot a new Advance Clearance Service for R&D expenditure credit (RDEC) claims, to provide pre-filing agreement for 3 years.
Intangible Fixed Asset regime
The government will consult in 2018 on the tax treatment of intellectual property (the Intangible Fixed Asset regime). This will consider whether there is an economic case for targeted changes to this regime, so that it better supports UK companies investing in intellectual property.
Philip Hammond allocated an extra £2.3bn for R&D investment, saying the money represented “the first strides towards the ambition of our industrial strategy to drive up R&D investment across the economy to 2.4 per cent of GDP”. This will bring the annual total investment spend to over £12.5bn.
This strengthens the government’s previous commitment to spending an additional £2 billion a year by 2020-21 on collaboration between business and scientists; increasing government R&D spending by around 20 per cent.
The UK currently invests 1.7 per cent of GDP in private and public R&D funding. The government on Monday reiterated its pledge to reach 2.4 per cent, the average for the OECD club of developed countries, by 2027.
From April 2018, the seven UK Research Councils and Innovate UK will be merged into one new body and will be allocated at least £6bn annually for R&D investment.
It will be tasked with reducing regional disparities in spending across the country and to encourage more commercialisation of research from ‘the valley of death’.
- To enhance the adoption of AI – the government will create a new Centre for Data Ethics and Innovation, to permit safe and ethical innovation of AI and data driven technologies.
- Regulators’ Pioneer Fund: helping to unlock emerging technologies and permit new products and services get to market – the government will form a new £10 m Regulators’ Pioneer Fund.
UK Games Fund
The government aims to provide a further £1m to extend the UK Games fund to 2020 – permitting early stage video game developers financial and business support.
Next Generation Vehicles
To support the transition to zero emission vehicles – the Government is investing over £500m to support the regulation, roll-out, and development both zero emission vehicles as well as Connected and Autonomous Vehicles (CAVs or driverless cars). Following this announcement, there are plug in car grants available.
Access to finance for innovative companies
- Establishing a new £2.5 billion investment fund incubated in the British Business Bank
- Doubling the annual allowance for individuals investing in knowledge-intensive companies through the Enterprise Investment Scheme (EIS)
Oil and Gas: transferrable tax history:
- The Government will introduce a transferrable tax history (TTH) mechanism for UK Continental Shelf oil and gas producers for deals that complete on or after 1st November 2018. This measure is designed to help companies to reduce decommissioning costs by allowing tax relief based on the tax paying history of the oil field concerned.
Avoidance and Evasion: additional compliance resource:
- This policy measure aims to continue a substantial drive to more coherent tax compliance, since 2010 the Government has benefitted significantly from enhanced tax compliance, and aim to continue this push. The Government expects to receive a significant tax benefit from this policy measure during the forthcoming 5-year period.
Guang Deng, Leyton UK Managing Partner – Advisory, commentary
Lack of economic clarity in the short-term in the UK provides an opportunity for the Government to pursue innovation and R&D to help create more robust economic growth in the long-term and remain competitive within the international business environment. With additional Brexit uncertainties, the Government will continue to pursue increases in productivity to bolster stagnating economic growth and fill the void left with the pending European Union exit. One underpinning factor is R&D innovation.
The Government’s drive to increase productivity through incentivising innovation across the board is good news for Leyton’s clients, ultimately companies have to increase their capacity to add-value, and in order to achieve this, more investment in innovative processes, technology and research & development is essential. From Leyton’s perspective, the Government’s adoption of more rewarding tax benefits and public spending is an opportunity to further increase Leyton’s capability to serve its clients on both R&D tax relief and grant offerings.
- An increase in the RDEC will prove to be beneficial for Leyton’s clients for the following reasons, increased qualifying expenditure for large companies and grant-funded projects fundamentally increases incentives to companies that keep investing in innovation.
- Following the substantial increase in funding for NPIF to align with the Government’s modern Industrial Strategy– it would be logical to assume an increase in innovative practice and development of new processes in infrastructure projects
- The continuation of the UK Games Fund with help support software and game developers to continue innovative activities, permitting the circumstances for more video game relief claims.
- A significant push into driverless cars and the transition to zero emission vehicles is good news for Leyton’s clients in the field – the increase in funds available for firms to develop new batteries and the generation of more efficient charging points will drive innovative activities and R&D. Leyton’s technical expertise in the automotive and chemistry sectors will ensure these R&D efforts are accurately understood, documented and rewarded by the government.
Acknowledgement of the significant and continuing growth of AI technologies – the new Centre for Data Ethics and Innovation provides a benchmark for UK companies to develop innovative technology. We have seen an influx of companies investing in AI technologies recently. Our software expertise will ensure you have a robust process in identifying and quantifying these intangible but rewarding activities.
- Transferrable tax history (TTH): Ultimately, this measure is to ‘level the playing field’ between buyers and sellers of oil and gas fields. The measure will permit companies who sell North Sea oil and gas fields to transfer some of their tax payment history to the buyers of said fields. Buyers will then be able to set some of the costs of decommissioning the fields at the end of their lives against the TTH. Decommissioning is one of the campaigns that our Glasgow office has launched recently and we have all the necessary engineering expertise to help you capture the intricacy of these operations at the end of any particular field asset’s life.
- Avoidance and compliance: during the previous 7 years, the Government has aggressively pursued additional tax compliance measures that have led to tangible fiscal benefits. Following this, the narrative from the Budget is that this practice will continue and increase – clients of Leyton should be aware that more resources have been allocated from HMRC and it is necessary to maintain our excellent working standards going forward to maintain good working practice and compliance with the rules and regulations set by the government.
It is also worth noting that the government is also determined to reduce red tape for hiring international talent. It will change immigration rules to enable world-leading scientists and researchers to apply for work in the UK.
Clearly, innovation is the new black of today’s economy.
 GDP forecasted to slow in 2018 and 2019 before rising to 1.6% in 2022.