laboratoryLast week’s Budget contained changes to the tax credit arrangements available to Small and Medium Enterprises in respect of Research and Development (R&D) costs.

The changes detailed by HMRC will benefit loss-making SMEs conducting research and development (R&D) activities.

From 1 April 2014, the rate of R&D payable tax credit for loss making small SMEs will be increased from 11% to 14.5%. This will increase the rate of the cash credit payable to SMEs that conduct qualifying R&D activity but do not have corporation tax liabilities. The tax relief on allowable R&D expenditure is currently 225% for small and medium-sized enterprises such that for every £1,000 spent, corporation tax relief can be claimed on £2,250. In financial terms, it means that HMRC will make a cash payment of over £32.62 for every £100 spent on qualifying R&D and this will be a welcome boost to small/medium innovative start-up companies.

Where a company incurs a trading loss for the period, it can choose to convert the loss into repayable tax credits. The Chancellor announced that the repayable tax credit rate will be increased from 11% to 14.5% for expenditure incurred on or after 1 April 2014.

The measure will provide further incentives for small companies and start-ups to invest in R&D. It targets companies for whom risks and market failures are most pronounced. The government say that this measure is consistent with the wider objective to support small innovative companies with high growth potential.

Background to the measure
R&D relief gives additional corporation tax relief for expenditure incurred on R&D projects that seek to achieve an advance in science or technology. A distinct scheme exists for SMEs, which was originally introduced in Finance Act 2000. For a SME with no corporation tax liability a tax credit can be claimed by way of a cash sum paid by HM Revenue & Customs (HMRC). A SME is a company or organisation with fewer than 500 employees and either an annual turnover not exceeding €100 million, or a balance sheet total not exceeding €86 million.

Detailed proposal
The rate increase will apply for qualifying expenditure incurred on or after 1 April 2014.

Part 13 of the Corporation Tax Act 2009 (CTA 2009, sections 1039 to 1142) provides additional corporation tax relief for R&D expenditure. Section 1054 of CTA 2009 provides for the payment of R&D tax credits to loss-making SMEs. Section 1058 gives the rate at which this payable tax credit is calculated.

Legislation will be introduced in Finance Bill 2014 to increase the rate in section 1058 of CTA 2009 at which the payable tax credit is calculated from 11 per cent to 14.5 per cent in respect of expenditure incurred on or after 1 April 2014.

R&D tax relief: conditions to be satisfied: the definition of R&D for tax purposes

In order that expenditure is treated as being on an R&D project, the project must satisfy certain statutory tests in accordance with published guidelines and legislation on the meaning of R&D. This is one of the more complex areas of the relief, and it is important to give this matter careful attention. There’s plenty of guidance and detail on the HMRC website. A word of warning: it’s very complicated and appropriate professional advice is needed. For example, in some cases there are particular difficulties in determining whether a project is R&D for the purposes of the relief and HMRC have published specific guidance on two fields: Pharmaceuticals at: CIRD81920, and Software at: CIRD81960

Martin Pollins
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