R&D Tax Credits – Good news for SMEs in the budget

John Moore, March 23rd, 2011

Today’s budget contains some really good news for those SME technology companies claiming the R&D tax relief.

The recent consultative process indicated a number of areas that companies were identifying as barriers to the relief being as effective as it needed to be.

Three of those areas have been addressed in the budget and these will be of particular interest to the population of SMEs .

Rate increase

Firstly the rate of relief will increase substantially over the next two years. Currently an SME can claim an additional 75% of the cost of qualifying R&D. This can then reduce the corporation tax payable if the company is paying corporation tax, or can be surrendered for a cash repayment if it has losses in the period.

For expenditure incurred after 1 April 2011 the rate of additional relief on qualifying expenditure will be 100%, giving a 200% deduction with the same ability to use this to reduce corporation tax payable or to surrender the enhanced losses for a cash payment.

For expenditure incurred on or after 1 April 2012 the rate of relief will rise to 125% meaning that 225% of the qualifying expenditure will be able to be used to reduce corporation tax payable or, if this creates tax losses, for this to be surrendered for a cash repayment.

Where changes have been made to the rate of the relief in the past the Government have reduced the percentage at which companies can cash in enhanced losses under the scheme to keep the aid intensity broadly similar. For expenditure incurred on or after 1 April 2011 SMEs will be able to surrender enhanced losses for 12.5% of their value. This is a slight increase on the current position. Currently this is worth 24.5% of the qualifying cost of R&D; from 1 April 2011 this will rise to 25%, an increase of 0.5%. It is highly likely that this 25% benefit will be maintained for expenditure incurred from 1 April 2012, due to EC rules on the amount of cash aid that can be given by a Government.

Removal of PAYE & NIC Cap

Secondly many SMEs have been unable to surrender all the enhanced losses created by the relief due to the existence of a cap on the amount of losses surrenderable equal to the amount of PAYE & NIC paid by the company in the period. In response to consultation the Government have announced that from 1 April 2012 this cap will be removed. From that date companies with a large spend on R&D in proportion to the number of employees and salary bill they have will be able to claim a payable tax credit for the full amount of the relief available. This is a situation common to many start up SMEs and could significantly improve their cash flow and the impact the relief has on encouraging technological innovation. This change will be incorporated in the Finance bill 2012.

Removal of minimum R&D spend condition

Lastly, sending an important message for the encouragement of innovation for whatever size of project, it is proposed to remove the current de minimis limit of £10,000 before a company can claim. Again this measure will be brought in as part of the Finance Bill 2012.

The above changes will be dependent on the receipt of State Aid approval from the EC and the changes from 1 April 2012 will also be subject to further input from the consultation process.

The Government have also noted the intention to look at making changes to the rules governing the provision of relief under the large company scheme for work done by companies to whom work has been subcontracted as, in practice, this is an area which leads to some confusion on the qualifying nature of the work undertaken.

Whilst the above is good news for SMEs, it has also been announced that the amount of relief For SMEs available under the little used Vaccine Research Relief scheme will fall to 20% from 1 April 2011 and then not be available from 1 April 2012.

Our View

In our view these are the first positive responses to the issues raised in the consultation exercise recently held. These changes will be welcome by SMEs, representing a substantial increase in the rate of the relief and recognition of the importance of the relief in assisting cash flows of SMEs. Further consultation will be taking place over the coming months on the other ideas raised in the recent consultation exercise and these could be incorporated in future legislation following the 2012 budget and Finance Bill 2012.

Clearly with the positive changes announced above there is even more necessity for companies to ensure that they are optimising the benefits they receive under the scheme and to take advice to ensure they achieve this.