Draft legislation published today proposes further improvements to the R&D tax regime for SME companies. Small companies in particular should benefit from higher rates of relief and simplification of the qualifying criteria effective from April 2012.

The Government also intends to consult on the introduction of a new 'above the line' tax credit for large companies at the next Budget.

Baker Tilly analysis

We welcome the draft legislation published today which sets out further improvements to the R&D regime. Most of the new rules were announced earlier in the year in the Budget 2011 and on the whole should be beneficial to companies. In particular the increased rate of enhancement from 200% to 225%; the removal of the PAYE/NIC cap and removal of annual minimum expenditure limit should incentivise more small companies to undertake R&D.

The Government has also announced a proposal for a new 'above the line' R&D credit for large companies. Whilst the introduction of a separate relief for large companies introduces more complexity to the regime, the Government has promised that sufficient funds will be made available to ensure companies claiming relief under the SME regime are not adversely affected. 

In detail

Companies that are small or medium sized enterprises (SMEs) are eligible to claim the more favourable rates of enhanced tax relief for qualifying revenue expenditure on Research & Development (R&D). For these purposes an SME is broadly a company or group of companies with less than 500 people, and either annual turnover of less than €100m or balance sheet gross assets less than €86m.

The Government has published draft legislation today, which proposes the following changes to the R&D tax regime:

• Increased the rate of enhancement for SMEs from 200% to 225% for qualifying R&D expenditure incurred on or after 1 April 2012.
• Abolishes the £10k annual minimum expenditure requirement.
• Removes the PAYE/NIC cap which previously restricted refundable tax credit claims in certain circumstances.
• Relaxed the rules for payments made to businesses that provide staff to R&D companies. 
• Withdraws vaccine research relief for SMEs.

The Government has also published its response to the consultation document on R&D tax relief that was issued in June 2011. The highlights from today’s announcements include:

• An 'above the line' R&D tax credit for 'large companies'. Further consultation on the design of the credit will take place after the Budget 2012, with legislation expected in April 2013.
• Further guidance on qualifying indirect R&D activities.
• There will be no fundamental change to the going concern test, although refinements will be made to prevent claims during administration or liquidation.
• The Government has dropped proposals intended to provide more certainty for sub-contractor companies that carry out R&D projects. The Government will continue to explore solutions to this issue.