As part of this the Government is aiming to promote innovation and research and development (R&D) through a re-focusing of the corporate R&D tax credit scheme and the proposed patent box regime.
There is a general consensus from studies in various countries that additional tax relief for R&D expenditure results in higher levels of such expenditure than would otherwise occur. An HMRC evaluation showed that in the UK up to £3 of R&D expenditure is stimulated by each £1 of tax foregone. Over 8,500 companies made R&D tax relief claims in the UK in 2009 at a total cost to the Government of £980m. On average this equates to a saving of £39,000 per small to medium enterprise (SME) claimant and £329,000 per large company claimant. These are significant financial savings, based on significant expenditure.
Qualifying expenditure and available relief
Broadly, revenue expenditure qualifies as R&D for enhanced tax relief purposes if it seeks to achieve an advance in the overall knowledge or capability in a field of science or technology, such that expenditure which advances only the company's own knowledge alone is unlikely to qualify. Furthermore, expenditure must be related to the company's trading activities.
From 1 April 2011 SMEs (an SME for these purposes is one that has fewer than 500 employees, and either turnover no greater than €100m or balance sheet total no greater than €86m) can claim a 200% tax deduction for qualifying expenditure relating to qualifying activities (an increase from the previous 175% deduction), expected to rise to 225% for expenditure incurred after 1 April 2012.
Large companies are those that do not qualify as an SME and are entitled to a 130% deduction on all qualifying expenditure incurred on or after 31 March 2008 (125% deduction prior to this). The current consultation indicates there may at some point be a relaxation in the way subcontract R&D expenditure for large companies qualifies. There is no payable tax credit for large companies.
A claim must be made to HMRC in order to take advantage of the R&D tax relief. Claims must now be made to HMRC within one year after the filing date of the claimant's corporation tax return i.e. by two years after the end of the relevant accounting period.
Looking to the future
This represents a potentially significant level of relief available to many companies, and the overall regime is set to improve. Further consultation is proposed in the autumn and a pilot will be introduced for voluntary advance assurance on the validity of an R&D tax relief project for small companies and new start ups.
If you have any queries concerning R&D tax relief please contact Colin Aylott, or a member of the corporate tax team.
