The government would like research and development (R&D) to be its flagship tax relief. However, due to the complexity of the rules and making a claim, the uptake for the relief has been desperately low.
The good news is that over the past two Budgets, the government has revisited the idea of R&D tax relief. As well as increasing the relief, the conditions have been softened which makes it easier for companies to qualify for R&D tax relief.
R&D relief operates at two levels, one for small and medium sized enterprises (SME’s) and one for larger companies. The recent changes have been designed to add flexibility to the SME market.
However it is important to note that not all changes have been in favour of the company claiming the relief.
With effect from 1 April 2012, the rate of payable tax credits available to set against PAYE liabilities has reduced from 12.5% to 11% of any loss created by R&D tax relief. In addition, Vaccine Research Relief, a subsidiary of R&D tax relief was withdrawn from 1 April 2012.
Despite this, there is some good news. From 1 April 2012, the tax deduction available for R&D expenses correctly claimed by SME’s has increased from 100% to 125%.
By way of an example, if a company spends £10,000 on qualifying R&D expenses from 1 April 2012, then a corporation tax deduction of £22,500 becomes available. Assuming that the company pays tax at the small profits rate, a corporation tax deduction at this level will result in a saving of £4,500.
It is now also easier to make a claim for R&D tax relief. This is due to certain restrictions which have been lifted in respect of expenses incurred on or after 1 April 2012.
There is no longer a requirement that a company must have spent a minimum amount of £10,000 on qualifying R&D expenses, including capital items, in any accounting period for which it wanted to make a claim.
There is also no longer a restriction on the amount that can be claimed back as tax credits against PAYE liabilities already paid. Historically, the payable tax credits were capped by the amount of PAYE and NIC’s the company had incurred in the same period.