R&D Tax Credit Fun

The R&D tax credit is one of the biggest scams around, actually.

The bulk of the qualifying expenditure is salaries, of course, so let's look at...

1) A large company. It pays a scientist £100,000 salary, on top of which it has to pay approx. £12,000 Employer's National Insurance during the course of the year. When it prepares its corporation tax return, it can reduce its taxable profits not just by the £112,000 but by an additional 30% thereof, so its corporation tax bill is reduced by 28% x 30% x £112,000 = £9,408, which is rather less than the Employer's National Insurance that it paid in the first place.

If you want to dot i's and cross t's, I suppose you could argue that the company also got 28% tax relief on the £12,000, which is another £3,360, bring the total relief to ever so slightly more than the Employer's National Insurance it paid, but it's one heck of a long way round.

2) A small or medium sized company which is in start-up mode and doesn't have taxable profits (yet) employing a scientist on the same salary as before. It can reclaim, in cash, a maximum of 14% x 75% x £112,000 = £11,760, a tad less than the Employer's National Insurance it paid. Again, one heck of a long way round.

Is it just me, or would it not be easier to just phase out Employer's National Insurance? Don't forget that the relief only applies to incorporated businesses - not sole traders or partnerships (or indeed LLPs, which don't count as incorporated for most tax purposes).