By ACCA’s Budget team
R&D is a relief that works; it benefits business but has become increasingly difficult to claim. As part of the Corporate Tax reform programme, the Government consulted on the effectiveness of the current research & development (R&D) tax relief schemes.
There are two schemes for obtaining R&D relief – the Small or Medium-sized Enterprise (SME) scheme and the Large Company Scheme.
Relief is available where a R&D project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty.
The SME scheme rules allow companies an additional 75% Corporation Tax deduction in respect of their qualifying R&D expenditure, making an effective total 175% deduction. If a SME makes a loss, it can choose to receive tax relief by way of a tax credit. The credit is limited to the amount of PAYE and NIC liabilities for the period.
Tax relief under the Large Company Scheme is given at an effective rate of 130%.
Only certain categories of expenditure can qualify for enhanced R&D relief, principally staff costs and consumables. Subcontracted R&D costs are subject to special rules and often only 65% of such costs can be used in a claim for relief. Some of the detailed rules vary depending on whether the claimant company is an SME or a large company.
The minimum expenditure threshold under both schemes is £10,000.
The Chancellor has announced that additional deduction for spending on research and development for companies that are SMEs will be increased from 75% to 100% from 1 April 2011. The effective rate of relief for expenditure will therefore be increased from 175% to 200%.
There will also be a further increase of 25% to the deduction for SMEs with effect from 1 April 2012, giving a total deduction of 225%.
The rate of vaccine research relief for SMEs will also be reduced to 20% from 1 April 2011 and from 1 April 2012 SMEs will no longer be able to claim vaccines research relief. These measures allow for the above increases in the deductions, while remaining within State aid intensity thresholds.
The above changes are subject to State aid approval.
The Budget announcement does not propose to change the rate of relief under the Large Company Scheme.
Subject to further consultation, the following further changes will be made to simplify R&D tax relief:
- Abolition of PAYE/NICs cap on the amount of payable tax credit that can be claimed;
- Abolition of the £10,000 minimum expenditure condition; and
- Changes to the rules governing relief for work done by subcontractors under the Large Company Scheme.
The Government will publish a response to the consultation in May 2011.