Budget Reflections

The Chancellor announced a mix of immediate and future (FB 2012) changes to the R&D Tax Relief regime.  These changes primarily affect the relief for SMEs, although there are two proposed changes to be included in FB 2012 that will also benefit large companies.  The main change is to increase the rate of relief for SMEs over the next two years.

For expenditure incurred on or after 1 April 2011 by an SME, the rate of relief will be increased from 175% to 200%.  This means that for every £100 incurred by an SME on Qualifying R&D Expenditure, the company will be able to claim a deduction of £200 in computing its corporation tax profits.

When the rate was last increased (in 2008, from 150%), the rate at which a loss-making SME could claim a repayable Credit was reduced from 16% of the surrenderable loss to 14%.  The effect of this was that the amount of Credit received, as a percentage of the Qualifying Expenditure, remained broadly unchanged (24% before the change, 24.5% after).  There is no specific mention of this in the Budget documents but a similar change will be needed to maintain the Credit within State Aid limits.  From my discussions with HMRC, I understand that the intention is to reduce the Credit to 12.5% of the surrenderable loss for 2011/12.

Although these changes are stated as having effect from 1 April 2011, the SME relief is a State Aid and, as such, EC approval is needed for changes.  The proposals are, therefore, subject to that approval being forthcoming.

A consequential further change affects the Vaccine Research Relief (VRR) scheme.  The rate of relief for SMEs under this scheme will reduce at the same time to 20% (currently 40%).  This relief is in addition to any R&D relief (for appropriately qualifying expenditure) and the reduction is necessary to keep the total relief within State Aid limits.

The Chancellor also announced an intention to include legislation in FB 2012 further increasing the rate of relief for SMEs to 225%.  At the same time, the rate of VRR for such companies would reduce to 0%.

At present, a loss-making SME claiming a repayable Credit is limited to the amount of its PAYE and NIC liabilities for the relevant period.  It is proposed to remove this restriction.

There is a de-minimis level of Qualifying Expenditure required for a claim; currently, this is £10,000.  It is proposed to abolish this condition for all companies.

At present there can be problems when subcontracting work to a third party where that activity is not R&D in its own right.  If it were carried out in-house, it could be considered as part of the wider R&D project but once sub-contracted, it has to be looked at in isolation.  It is intended to introduce rules to overcome this problem.  Inevitably, the details will only become clear in time.

The following table summarises the effects of these increased rates.

I welcome all of these changes, both immediate and future, as they will help to improve the effectiveness of this regime.  SMEs in particular will be much better off as a result of the rate rises and I am sure that they will be very pleased.  Unfortunately, for large companies the effective rate of relief is being allowed to fall as the rate of Corporation Tax is reduced.