Jeremy Hunt's new tax regime heralds change in how Yorkshire businesses manage innovation: Steve Blacker

Cashback for SMEs used to be up to 33 per cent of qualifying expenditure on R&D. But this now only applies to companies where more than 40 per cent of total expenditure is on R&D. For the majority of SMEs that won’t meet this new threshold, cashback has dipped down to 18 per cent.

Simultaneously, there’s fresh ambition for HMRC to scrutinise R&D tax claims more tightly in a clamp down on fraudulent activity.

Leadership teams need to gather more information, reports, and evidence of R&D activity. This naturally makes the process more time intensive and expensive - risking some to lose out on accessing rewards that may have become a mainstay for their cashflow.

Such change is heralding a rethink in how businesses manage their innovation. Patent filing to secure the 10 per cent corporation tax rate on patent-related profits, seeking innovation grants, and bringing forward capital spend and associated tax allowances, could help recoup any benefits lost to the latest tax changes.

Since the start of April, businesses with profits over £50,000 may suffer the new 25 per cent Corporation Tax rate. But they could pay a reduced rate of 10 per cent Corporate Tax if it exploits patented inventions and innovations.

Many businesses can naturally be hesitant to filing patents. The process can be time-consuming, which can prevent quick reactions to new market dynamics. But they can enable a reduced rate of tax, and a narrowly defined patent can be achieved without giving away their competitive advantage.

Another way of reducing or even eliminating the Corporation Tax burden is to accelerate investment in capital expenditure to take advantage of the ‘full expensing’ regime, the follow on from the super deduction.

While there are some exceptions, companies can deduct the whole sum of investments in qualifying plant and machinery in one go from their gross profits, with half being deductible for integral features.

This means if a business re-invests all gross profits, then in many cases they will not have to pay any Corporation Tax. Instead, they could acquire new technologies, machinery or other assets to supercharge R&D activity.

Full expensing represents a smaller payback than the super deduction, but it could still represent a big saving for many – at up to 25p for every £1 spent.

Finally, reduced R&D tax relief could also encourage more leadership teams to engage with innovation grant competitions, which can provide VAT inclusive rewards from anywhere between £5,000 to £m+ and provide opportunities for wider innovation collaboration.

We know first-hand the strength of R&D innovation in the region, working alongside innovators that are driving progress in advanced manufacturing, artificial intelligence, and zero-carbon technologies.

But it’s incumbent on the region’s innovators to explore how they can manage their innovation alongside trusted advisers. That way, they can maximise the free cash they have to catalyse their innovation – helping Yorkshire innovators to continue solving important societal challenges like net zero, or to race at new market opportunities.

Steve Blacker is director for Corporate Tax at KPMG UK in Leeds