Research & Development tax credits

On 6 December 2011, the Government published draft clauses for legislation to be included in Finance Bill 2012, and other tax updates.

This included further proposals in relation to Research & Development (R&D) Tax credits.

A formal consultation on the support R&D tax credits provide for innovation and the proposals of the Dyson Review was held in 2010. The Government then announced reforms to the R&D tax credits schemes at Budget 2011 and published a full response on 11 June 2011.

That response also launched a further consultation seeking views on proposals to simplify the schemes and make them more effective, including relief for Qualifying Indirect Activities; how to give relief for subcontracted ‘routine’ activities; the removal of the PAYE/NICs cap and potential changes to the ‘going concern’ definition.

The Government also requested comments on the proposal put forward by a number of respondents to move from the current ‘superdeduction’ system to one which delivered a credit against tax liability.

The further consultation closed on 2 September and the Government’s response was published on 6 December 2011.

Meanwhile, the Chancellor announced in his Autumn Statement that the Government intends to introduce an ‘above the line’ tax credit in 2013 to encourage research and development activity by larger companies. The Government will consult on the detail at Budget 2012 and has pledged  that the level of SME R&D relief will not be reduced as a result of this change.

Following consultation in 2012 on the details, legislation for an ‘Above the Line’ R&D tax credit will be included in the draft Finance Bill to be published in 2012.

The credit will be effective from April 2013 and will work as follows:

  • The R&D tax credit can be accounted for as a reduction in the R&D spending of the company – not just reflected in the tax line of the accounts.
  • Any unused credit (i.e. if the company is loss making) will now be payable to the company (rather than carried forward in losses to be offset once the company is profitable).
  • This will increase the visibility and certainty of the R&D Tax Credit, making it more attractive to multinational investors.

In addition, draft Finance Bill 2012 legislation contains the following changes to R&D tax relief from April 2012:

  • The SME R&D relief will be further increased giving relief of 225% of qualifying expenditure (while the rate of payable credit for SMEs will be reduced to 11%).
  • The rule limiting the payable credit to a company’s PAYE/NICs liability will be removed.
  • Following the further consultation on R&D tax credits, the existing definition of when a company is a "going concern" will be clarified to confirm that companies in administration or liquidation are excluded from relief.
  • The requirement for minimum expenditure of £10,000 pa will be removed.
  • In addition to the announcements made at Budget, the definition of an "externally provided worker" will be widened to allow claims for staff provided indirectly through more than one party.

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