Posted on Wednesday 23 March 2011 byUlster Business
By Caroline Keenan, ASM Accountants
How do we measure up?
It would be difficult to have escaped hearing the ongoing discussion and debate on the lobbying for a cut in the corporation tax rate for Northern Ireland, with some arguing for a rate of 12.5% similar to that enjoyed by the Republic of Ireland (RoI).
It has been argued that the proposal to reduce the rate of corporation tax is a central plank of a strategy now required to rebalance the Northern Ireland economy, and to address the significant growth required in the private sector of our economy.
Others though have taken the view that additional tax incentives, for example, for investment in innovation, would be a more attractive proposition in seeking to stimulate economic growth in the Province.
It has been recognised that tax incentives have a key part to play in encouraging innovation. In the RoI tax incentives have historically been used to both attract foreign direct investment, and to encourage home-grown innovation.
The UK Government has recognised that encouraging innovation is a vital component in a strategy for improving the UK’s productivity, performance and competitiveness. The UK R&D Tax Relief Regime was introduced in April 2000 for Small & Medium Sized Enterprises (SMEs), and two years later extended to include Large Companies.
The regime exists to incentivise and motivate companies to invest in innovation. Northern Ireland as a region stands to benefit greatly from such an incentive, where the rate of R&D tax relief for SMEs is an extremely generous 17.5%, which translates to a 21% tax saving, assuming a rate of corporation tax of 28% applies.
The mechanics of operating the RoI R&D Tax Credit Scheme are slightly different in that a company can claim a tax credit of 25% of incremental qualifying R&D expenditure in any year, which is then used to reduce the corporation tax payments for the company in the year.
Unlike the UK system, where the company can claim the relief on the whole of the qualifying R&D expenditure in any year, the RoI system only permits relief to be claimed on the "incremental" spend in a particular year over and above the base year spend – taken as the spend in the 2003 year for all accounting periods.
Even with such a generous level of relief under the UK system, the level of take-up in Northern Ireland was extremely disappointing in the early years. A large number of companies failed to recognise their entitlement to the relief believing it only to apply to the "test tube and white coat" type of research, and not to other areas of R&D.
Encouragingly there has been a dramatic increase in the level of reported spend on R&D in our local economy. The Department of Enterprise, Trade and Investment reported in December that total business R&D expenditure in 2009 was £323.7m, up £139.8m (76.0%) on the previous year – the largest annual increase since the annual R&D survey began in 2001. The challenge will be for those companies investing in R&D to ensure they are fully availing of all the tax incentives available.
The RoI has also experienced significant rises in the level of R&D spend reported, predominantly fuelled by a number of large Foreign Direct Investment companies choosing to locate there, including some of the world’s leading research-intensive multinationals. Total R&D spending as reported in the RoI almost trebled to €2.6bn in 2008, equivalent to 1.66% of the Gross National Product (GNP), with expenditure by businesses accounting for close to €1.68bn of this total.
Even with our encouraging reported increase in the level of R&D expenditure by business in Northern Ireland, we still have some way to go to compare to that experienced south of the border.
To encourage even greater focus on Innovation in the RoI, the RoI Government commissioned an Innovation Taskforce. One of its key recommendations was in relation to improving the existing R&D tax credit.
Interestingly in the UK, David Cameron, as Leader of the Conservatives Party, commissioned Lord James Dyson in October 2009 to carry out a review to "help the Conservatives reawaken the UK’s innate inventiveness and creativity". The Report, published in March 2010, contained many recommendations – which at this stage have yet to be implemented. David Cameron commented that "we will consider the implementation of the Dyson Review to make the UK the leading hi-tech exporter in Europe, and refocus the research and development tax credit on hi-tech companies, small firms and start-ups."
There is a clear recognition in both jurisdictions that tax incentives have a significant part to play in encouraging further investment in innovation, and in serving to stimulate future economic growth. The successful exploitation of new and existing ideas is the means by which regional economies can differentiate and exploit their unique skills and capabilities in order to compete in the global economy.