As we previously reported, in our article written at the time of the release of the draft legislation at the end of 2011 on this subject, the Government consulted on ways in which the effectiveness of the relief could be improved. These changes were enacted in Finance Act 2012 this summer and it is clear that not all companies who will be affected by these are aware of the potential benefits. The following is a summary of the recent changes to the relief:
Changes to SME Scheme
The majority of the changes affect companies claiming under the SME scheme. These changes are:
- The rate of additional deduction is increased from the current 100% to 125% for expenditure incurred on or after 1 April 2012. The total deduction for qualifying R&D expenditure is therefore 225%. Although corporation tax rates have been falling , which could have led to an erosion in the effective benefit achieved, the recent increases in the rate of R&D tax relief have more than made up for this.
- As a result of the increase in the additional tax deductions given under the relief the rate of payable tax credit claimable by those companies not paying corporation tax is reduced to 11% of the surrenderable losses from 12.5%. Whilst this looks like a sizeable reduction in the relief it is necessary to keep within the EC state aid limits on the value of the relief due to the increase from 100% to 125% above. The effect of this is to reduce the amount of cash payable to the company from the current 25% of the enhanced losses to 24.75%. This means that non tax paying companies relying on the cash repayment will not be better off under the new rules.
- The vaccine research relief (VRR) has been withdrawn for SMEs with effect for expenditure incurred on or after 1 April 2012. Previously those companies incurring qualifying expenditure under both the R&D tax relief scheme and the VRR scheme were able to claim both reliefs. From the effective date SMEs will no longer be able to claim under the VRR scheme. For affected companies, and very few claims are being made, any reduction in the support given will be to some extent offset by the increase in the amount given under the R&D tax relief scheme and the further relaxations below.
- The rule limiting the amount of the payable R&D tax credit to the amount of the company’s PAYE/NIC liability paid in an accounting period has been removed with effect for accounting periods ending on or after 1 April 2012. This means that SMEs with small salary and wage bills may now have access to increased cash refunds, an issue which has often prevented such companies from being able to obtain the cash funding that they had hoped the incentive would provide.
- A company that is not a going concern may not make a claim under the SME scheme. The consultation process had invited comments on the potential to change the definition of going concern. What was proposed was a very much more subjective test and one that we were concerned would lead to less clarity for claimant companies. The existing definition is being kept, but the recent change means, in addition to looking at whether the last set of accounts was prepared on a going concern basis, that a company is not entitled to claim relief where it has gone into administration or liquidation. This change has effect for any claims made on or after 1 April 2012.
Changes to both the SME scheme and the large company schemes
- The new legislation removes the requirement for a company to spend at least £10,000 on qualifying R&D before it able to make a claim. We consider that this is good news for the incentivisation of those companies performing R&D at a small scale. Clearly this small scale work may lead to further R&D projects in the future.
- For those companies that have to use “externally provided workers”, where the R&D work is not carried out by employees, but where the labour is supplied by a staff provider, then the existing rules have often prevented companies from claiming all of the costs of these workers. This was due to the need for there to be only three contractual parties in the arrangements. For expenditure incurred on or after 1 April 2012 this restriction is removed allowing there to be any number of parties in the supply chain. This will enable companies to more easily obtain the relief in situations where they need flexibility over the way in which the labour is supplied to them.
Again the Government have demonstrated their commitment to listening to the view of business about how best to target the reliefs that are designed to incentivise the performance of R&D in the UK. The Government have estimated that these changes will cost approximately £60m per year. We welcome the on-going commitment to the improvement of the schemes, in this case particularly to the advantage of SMEs who often have an urgent need for effective cash funding of R&D.
Please do not hesitate to contact John Moore on 0207 292 8850 or at firstname.lastname@example.org if you would like to discuss the potential impact of this change to your R&D tax relief claims, or any other aspect of the R&D tax relief regime.
This briefing is prepared by Kingly Brookes LLP, a limited liability partnership. For further information on any of the material contained in or referred to in the briefing, please contact us. This briefing note is intended to keep our readers up to date with the developments in this area, but it is a general guide only and is not intended to be a comprehensive statement of the law and practice in this area. No liability is accepted for the opinions it contains or for any errors or omissions.