The Government has recently implemented further changes to the Research & Development (“R&D”) tax relief schemes, and further changes are set to take effect from 1 April 2012.  By way of background, we have addressed two key questions prior to outlining these changes:

1.       What qualifies as R&D for “tax purposes”

What qualifies as R&D for “tax purposes” is often significantly different from what people perceive to be R&D.  We have experience of submitting successful R&D claims for companies which initially thought their activities would not qualify.  We have assisted numerous companies in the submission of successful R&D claims, maximising their R&D entitlement by ensuring the entire range of activities (which can include routine work associated with the R&D project) and costs have been captured and claimed.

If you can answer yes to any of the following questions (or if you think the answer is yes) we suggest you speak to Paul Arnold, our main R&D specialist:

·         Are you investing resources to keep ahead of the game?

·         Are you doing something that is innovative or unique?

·         Are you working on solving a problem that has never been solved before (or the solution is not within the public domain)?

2.       What are the financial benefits of the R&D tax relief schemes

Companies which qualify as an SME (generally those companies with less than 500 employees) can now claim an enhanced tax deduction of 100%.  For example, if a company incurs £100,000 of R&D expenditure it would not only claim tax relief for the expenditure it incurred, but also an additional £100,000 of tax relief could be claimed (i.e. £200,000 in total).  This could reduce the company’s tax liability by an additional £26,000.

Should the SME be loss making it would have the option to surrender the tax losses relating to the R&D for a tax free cash receipt.  In the above example the company could surrender (in essence sell to HMRC) up to £200,000 of tax losses for a tax free cash receipt (i.e. cash in the bank!) of £25,000 (limited to the PAYE/NIC liabilities of ALL company employees).

There are a wide range of costs that could potentially qualify; including staffing costs (salary, employers’ NIC, employers’ pension contributions and reimbursed business expenses), consumables, power, fuel, water, computer software, contracted out activities, the use of agency staff and payments to the subjects of clinical trials.

Companies which do not qualify as an SME could claim under the large company scheme.  This entitles the company to claim a 30% enhanced tax deduction; although there is no option to surrender tax losses for the tax free cash receipt under this scheme.

Changes to the SME scheme from 1 April 2011

·         The enhanced tax deduction increased from 75% to 100%; and

·         The tax free cash receipt increased from 24.5p to 25p for each pound of R&D expenditure incurred.

Changes to take effect from 1 April 2012

·         The enhanced tax deduction for SMEs will increase to 125% (i.e. tax relief of £225,000 can be claimed for each £100,000 of R&D expenditure incurred, which could reduce the company’s tax liability by an additional £31,250);

·         The maximum tax free cash receipt for SMEs will remain unchanged at 25p for each pound of R&D expenditure incurred;

·         The tax free cash receipt will no longer be restricted by the company’s PAYE/NIC liabilities (i.e. it could be claimed even if the company has no PAYE and NIC liabilities);

·         The minimum spend requirement of £10,000 is to be abolished; and

·          Potentially greater relief for subcontractors undertaking routine work.

This is in addition to other recent developments which has made the relief more attractive.  This includes the change in HMRC’s stance on production activities and support functions, the IP condition being removed under the SME scheme, and the doubling of the SME limits to name but a few.

Paul Arnold can be contacted on paul.arnold@broomfield.co.uk in respect of any R&D queries that you may have.  In addition, with the ongoing Consultation process into the R&D scheme closing on the 2 September 2011 please contact Paul if you would like your views incorporated in our response to the Treasury.

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