Two key announcements in the Budget provide an incentive for firms to invest.
Our annual survey of the financial sector showed, among other things, increased confidence in the state of the UK economy, a consequential increase in respondents' optimism for their own firm's performance for the forthcoming year, and a desire to increase investment in technology.
Summarised below are two key announcements from the Budget concerning incentives for investment – R&D relief and AIA. The former, in particular, is seldom claimed in the financial sector as firms often think that their business won't qualify for the relief. However, many financial services firms could potentially benefit from R&D tax breaks through their investments in technology.
AIA doubles
From 1 April 2014, the AIA doubled from £250,000 to £500,000. So, 100% tax relief is now available on up to £500,000 of capital expenditure qualifying for capital allowances. The increase in the allowance will be effective until 31 December 2015, with transitional rules applying for businesses with accounting periods spanning 1 April 2014 or 31 December 2015.
This is welcome news and gives firms an additional incentive to invest in equipment, as the accelerated tax relief can provide significant cashflow benefits. It should be noted, however, that this window of opportunity is only available until 31 December 2015, after which the AIA is expected to fall to £25,000.
R&D – a generous relief
Financial services firms should consider whether the investment they make in their IT systems qualifies for R&D tax relief. This may be the case for bespoke systems, where the business pays for IT design and improvement costs.
From 1 April 2014, the payable tax credit increased from 11% to 14.5% for SMEs, i.e. those with fewer than 500 employees that satisfy certain financial limits. With an uplift of 125% on qualifying R&D expenditure, loss-making SMEs will be able to reclaim 32.63% (14.5% of 225%) of that expenditure in the form of a payable tax credit.
This increase is particularly welcome for start-up and other companies undertaking R&D and incurring tax losses, though consideration will need to be given to the merits of the amount and timing of a cash refund now or tax relief later.
Larger companies incurring qualifying R&D expenditure currently have the option of claiming an enhanced deduction of 130% or a 10% expenditure credit. The amount of relief is slightly higher with expenditure credits, but can cause timing issues with quarterly instalment payments of corporation tax and accounting presentation can be a key issue for some companies. It is only possible for the expenditure credit to be reclaimed as cash by loss-making companies. While the expenditure credit is currently available by irrevocable election, it will be the only method of large company R&D relief from April 2016.
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