R&D Tax Relief

News

March 2011 Budget Updates...

Following the consultation that took place earlier this year, a number of key changes (some of which were formally recommended by us) have been proposed for SMEs:

The rate of additional deduction for SMEs has increased to 100% from April 2011 (was 75%) and to 125% from April 2012 (subject to EC approval as this relief is effectively a “notified state aid” under EC rules) – for a tax paying SME, the effective tax benefit from April 2011 has therefore increased, though this is slightly offset by the reduction in CT rates. For a loss-making SME, the rate of cashback has reduced to 12.5% from April 2011, keeping the effective cashback benefit at 25%. Presumably this rate will drop again next year to keep the cashback benefit roughly the same.

Tax Year	Additional Deduction	Main CT rate	Effective Rate of Benefit	Cashback Benefit
2010	75%	28%	21%	24.5%
2011	100%	26%	26%	25%
2012	125%	25%	31.25%	24.75%??

A number of proposed simplifications to the SME scheme have also been recommended and the Government will publish a response to further consultation in the autumn of 2011 which will confirm the details of these changes and their effective date (expected to be April 2012). At a high level, they have noted that these will include the following:

Removal of the PAYE/NIC limit on the cash credit that can be claimed
Removal of the requirement for a minimum expenditure of £10,000
Removal of Vaccine Relief Scheme for SMEs
Increase to SME additional deduction to 125%

Following the further consultation some more aspects may be addressed and include

Changes to the rules to allow relief through the large company scheme for subcontracted activity which forms part of a wider R&D project (details in consultation)
Changes to simplify EPW rules
QIA clarifications
Changes to the definition of a "company in difficulty"

More guidance is planned to address a number of areas. This is great news and demonstrates a commitment to the SME regime, with the Government taking heed of advice from specialist consultancies such as ourselves on the effectiveness and failures of the existing legislation. The increase in the additional deduction rate and removal of the PAYE/NIC cap will ensure that innovative start-ups and existing small businesses really see the benefit of this relief, even if they use third party expertise to help in their development work (through hiring expert contractors and/or subcontracting pieces of work).

For Large Companies, the budget did not bring significant changes. There was no increase to the additional deduction rate for large companies and many businesses will be disappointed because the rate of relief for such companies will be reduced in April 2011 from 8.4% down to 7.8% as a result of the reduction in the main rate of corporation tax. The removal of the de minimis of £10,000 mentioned above is also effective for large companies. One proposal currently being considered for all sized companies is a change to a "above the line" tax credit, which may specifically help large companies. Some of the general changes planned for next year, such as the simplification of EPW rules may also particularly help large companies who use a lot of contractors.

On a final note, the Government has published outline details on the introduction of a Patent Box, with further consultation underway and draft legislation planned for autumn 2011. The patent box will provide a reduced 10% corporate tax rate for profits from qualifying patents. The scheme is expected to operate from April 2013 and one proposal is that it may apply to all qualifying patents, including historical ones.

Older Changes:

January 2010 ; HMRC have issued their updated online guidance manual to include the new advice on Qualifying Indirect Activities. Activities that have previously been excluded are now to be allowed, and back claims are possible if within the usual time limits (two years from the end of the accounting period). Experience so far suggests that claims can increase by 10-20%.

December 2009 ; the prebudget report signalled that the need for SMEs to own (or share) the IP in order to make a claim is being removed. This applies for accounting periods ending on or after 9 December 2009.

2009 ; HMRC have issued some specific guidance on claims where "production" activities are taking place. This is in response to perceived abuses where goods and/or services have been supplied to paying customers with R&D tax relief also being claimed. The guidance is rather long and involved and attempts to clarify this situation and yet still allow subcontracted-in (paid for) eligible R&D to be claimed as specified in the legislation. Claims for eligible projects taking place alongside production are still acceptable, but great care is needed to clearly separate such activities. Generally where client funding is present it is advisable to seek expert advice. It may be that HMRC's position will be legally challenged, but in our experience so far they have been reasonable where the facts are clearly explained.

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