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4th January 2012

Changes to R&D tax credits following Draft Finance Bill 2012

The following is advice from Paul Arnold in the Tax team at Broomfield & Alexander regarding changed to R&D tax credits:

Changes to R&D tax credits following Draft Finance Bill 2012

Changes to the R&D tax credits regime announced in the recent Draft Finance Bill 2012 can be summarised as below:

SME scheme
Increase in the enhanced R&D tax deduction rate

  • The enhanced R&D tax deduction rate is set to increase to 125% from 1 April 2012. Therefore, if £10,000 of qualifying R&D expenditure is incurred a company could claim tax relief of £22,500, providing a potential tax saving of in excess of £3,000.

Since 1 April 2011 the rate of the enhanced R&D tax deduction has been 100%, increasing from the previous rate of 75%.

Change in the amount of potential tax free cash

  • Loss making SMEs are able to surrender tax losses for a tax free cash receipt. From 1 April 2012 the maximum cash receipt will be 24.75p for each pound spent on R&D. Therefore, for expenditure of £10,000 a tax free cash receipt of £2,475 could be received.

This is a reduction from 25p in the pound which has applied since 1 April 2011, but still greater than the 24.5p that applied prior to this date.

Removal of the PAYE and NIC cap

  • Since the R&D tax relief scheme was first introduced claims for the tax free cash receipt have been restricted to the amount of the company’s PAYE and NIC liabilities.

However, for accounting periods ending on or after 1 April 2012 this condition will no longer apply. Therefore, such claims will no longer be restricted by the company’s PAYE and NIC liabilities.

Going Concern

  • From 1 April 2012 a company will no longer be able to make a claim if it is in liquidation or administration.

SME and large company scheme

Removal of the £10,000 minimum spend requirement

  • For a company to make an R&D claim its annual qualifying spend must be at least £10,000. However, this condition is set to be removed for accounting periods ending on or after 1 April 2012. A claim of any amount may then be made.

Expansion of the relief for the use of third party workers

  • Relief for the use of third party workers is to be expanded (i.e. Externally Provided Workers (“EPWs”).

This category of expenditure has always required a three way relationship. For instance, a company pays an agency for the provision of staff, and the agency pays the individual directly. If the agency paid the individual’s personal company, for instance, then this expenditure would not qualify (as there is more than a three way relationship).

However, for expenditure incurred on or after 1 April 2012 this condition is going to be relaxed, and relationships involving more than three parties (for instance, payments made to the individual’s personal company) will qualify.

If you are looking for more information on Research & Development tax credits, please contact Paul Arnold in our Tax team who would be happy to advise.  paul.arnold@broomfield.co.uk (01792 790444)