Foreign tax credit
The United Kingdom has an extensive network of DTTs. Unilateral relief is generally available, in any event, to credit overseas tax paid on non-UK source profits against the UK tax on the same profits; while the relevant treaty might sometimes extend that relief, their main function for UK companies is to limit overseas WHTs that would otherwise be payable on passive income.
The United Kingdom has a complex regime allowing 'underlying' tax relief in respect of foreign dividends, so that tax suffered at lower levels can be relieved (at least in part) where dividends flow to the United Kingdom via a chain of companies. However, that relief is only available where the dividend concerned is subject to tax. It is therefore of limited application because most foreign dividends are exempt from tax.
A variety of tax incentives are given in the form of enhanced tax depreciation allowances (known as capital allowances, see Depreciation and amortisation in the Deductions section). Some of these incentives are given by reference to the expenditure concerned and others by reference to the size of the company incurring that expenditure.
Annual investment allowance
All businesses, regardless of size, can claim an annual investment allowance of 100% on the first GBP 1 million (from 1 January 2019, previously GBP 200,000) tranche per annum of capital expenditure incurred on most qualifying expenditure. This is restricted to a single allowance for groups of companies or associated businesses. The increased annual investment allowance is available until 31 March 2023.
Research and development (R&D) incentives
Relief for expenditure of a revenue nature on research and development that is related to a company’s trade and is undertaken by the company or on its behalf is wholly allowable as a tax deduction. In certain circumstances, either enhanced relief is available, or a credit is available which is offset against R&D costs in the company’s profit and loss account.
Expenditure of a capital nature on research and development related to a company’s trade is also wholly allowable as a tax deduction (i.e. 100% capital allowances are available). This covers capital expenditure on the provision of laboratories and research equipment; however, no allowance is available for expenditure on land.
The Government has consulted further on wide ranging reform of Research & Development (R&D) Tax Relief. The consultation closed in February 2022. The Chancellor’s Spring Statement, on 23 March 2022, provided some further information on the reform of Research & Development (R&D) reliefs The Government provided some further clarifications on the changes to reform R&D credits with the detailed announcements expected in the Autumn. The key changes are:
- A new announcement to include pure maths research within the scope of the R&D relief. This is likely to benefit those undertaking data science or artificial intelligence based R&D activities.
- There was further clarification on the changes to allow data and cloud computing costs, which will now include cloud storage, which had been excluded from previous proposals.
- Proposals to fully exclude overseas costs from claims but the new proposals will allow some narrow exceptions for R&D that needs to be undertaken overseas, including where there are:
- Material factors such as geography, environment or population that are not present in the UK; or
- Regulatory / legal requirements where the activities must take place outside of the UK, such as clinical trials.
The practicalities behind these proposals remains to be seen as it will likely require the claimant to prove they were unable to undertake the R&D activities in the UK.
Draft legislation is to be published as part of the draft Finance Bill in the Summer. HM Treasury continues its review of the R&D schemes and we will also see further announcements on this in the Autumn.
R&D relief: SMEs
Certain companies incurring research and development expenditure of a specific nature are entitled to claim R&D tax relief.
A standalone company (or the group where the UK company is part of a global group) must be a small or medium-sized enterprise, as defined by the EU. The company (broadly together with any company of which it owns 25% or more, or which has more than 25% interest in it, subject to some exceptions) should have:
- fewer than 500 employees; and
- an annual turnover not exceeding EUR100m; or
- an annual balance sheet total not exceeding EUR86m.
The research and development may be undertaken by the company, or directly on its behalf. The R&D must be related to the company’s trade. Expenditure for which State Aid is received is excluded. R&D which is deemed to be funded or subcontracted to the company may only be claimed under the large companies RDEC scheme (see below).
Detailed below are the types of expenditure which may be included within claims.
Enhanced R&D tax relief is given by increasing the deduction for qualifying research and development in a company’s corporation tax computation from a 100% deduction to 230% deduction for qualifying expenditure.
One of the ways HMRC is tackling abuse in the SME regime is through the SME cap which applied from 1 April 2021. The amount of payable tax credit a qualifying loss-making business can receive is capped at three times the company’s total PAYE and NICs liability for that year. There is a threshold of GBP 20,000 so that the smallest claims are uncapped (i.e. a company receiving a payable credit of below GBP 20,000 for a 12-month period will not be impacted by the cap). There are also rules that attempt to limit the impact of the cap on some businesses with genuine R&D and IP substance in the UK.
R&D tax credits
Where an SME company has a ‘surrenderable loss’ it may claim an R&D tax credit. Generally, a surrenderable loss arises where the company incurs a trading loss.
The surrenderable loss is the lower of:
- the unrelieved trading loss; or
- 230% of the qualifying research and development expenditure.
The cash payment is currently 14.5% of the amount of losses surrendered (at January 2021). This equates to a cash repayment of up to 33.35% (being 230% at 14.5%) of the qualifying expenditure. Where the R&D tax credit is claimed, the trading loss carried forward is reduced by the amount of the surrendered loss
R&D Expenditure Credit (RDEC)
Relief under RDEC is available to large companies (unless subcontracted to the claimant company by a UK SME) and SME companies where expenditure has been funded or subsidised (by grant income, customer funding or otherwise).
This credit is different to the payable credit referred to above for SMEs. Companies may claim to receive a taxable credit payable at 13% (from 1 April 2020). The credit is brought into account ‘above the line’ and reflected in the operating profits of the company, similar to a grant. The credit itself is taxable and so taking a 19% corporation tax rate into account, the net benefit to the company of the credit is 10.5%.
Where the taxable profits can be attributed to the exploitation of patents, a lower effective rate of corporation tax applies. For 2021/22, the rate is 10%. Profits can include a significant part of the trading profit from the sales of a product that includes a patent, not just income from patent royalties. This scheme closed to new entrants from June 2016 (but will continue until 2021 for existing taxpayers), when a new Nexus scheme was introduced. The Nexus rules apply to new entrants to the patent box or new IP created on or after 1 July 2016 and to all companies from 1 July 2021. The Nexus scheme retains most of the features of the earlier scheme, but requires companies to stream their IP income, and the application of a fraction to relevant IP profits based on the proportion of R&D undertaken by itself. The Nexus scheme meets revised OECD principles and limits the qualifying IP profits based on the proportion of R&D undertaken by the company, by applying ‘the R&D fraction’.
A deduction equal to 150% of the qualifying expenditure on the remediation of contaminated or derelict land is given in the year incurred, which can be surrendered for a cash payment (at a rate of GBP 24 for each GBP 100 of qualifying land remediation spend) by companies that are trading at a loss.There are special tax reliefs available for certain expenditure on UK film production, high-end television, animation, video games, theatres, orchestras, and museum and gallery exhibitions.
There are no tax holidays and no foreign investment incentives in the United Kingdom.