The BBB proposes that US companies should be allowed to expense 100% of their domestic R&D costs from January 2025-2029 in the same year as they are incurred , rather than amortising them over five years as before.
The change would provide tax relief and immediate cash flow for firms investing in R&D. Firms can deduct the full cost of R&D expenses in the year they are incurred, reducing taxable income, lowering current-year tax liabilities, freeing up cash for investment into more R&D and boosting innovation by making investment in R&D more attractive .
In the UK, the Research and Development Expenditure Credit (RDEC) allows a 20% tax credit on R&D cost or 30% if you’re an R&D intensive, loss-making SME.
HMRC has been criticised recently for its aggressive scrutiny of R&D claims, over-complexity of the claims process, confusion over eligibility because of changes in policy and consequently a dampening effect on innovation.
At the moment we only spend 2.8% of GDP on R&D compared to 3.4% in the US. The new Spending Review plan envisages government R&D spending of £22.5 billion a year by 2029/30 up from this year’s £20.4 billion.
Although the RDEC scheme allows the full amount of a company’s R&D expense, including any grant, to be included in the claim for a 20% credit. the tax process reduces the net benefit to 15-16%.
A 100% tax credit paid in the same year as the spending was incurred would avoid the counter-productive effect on UK innovation of our tax system.
