BUDGET CHANGES TO R&D TAX RELIEF

In George Osbourne’s second coalition budget there are significant improvements to the SME scheme which will help thousands of innovative manufacturing companies in the UK.

The Chancellor has “taken on board” one of the recommendations of the Dyson Report published in March 2010 and has increased the additional deduction for corporation tax purposes from 75% to 100% from 1 April 2011 for SME businesses.

In other words, every £1 of expenditure on R&D activities from that date will be worth £2 for tax purposes.

Therefore, a SME company paying tax at the small company rate of 20%, will get 40% tax relief on its R&D activities.  Whereas companies paying tax at the full rate of 26% will get 52% tax relief.  SME companies in the marginal rate band and who pay tax on profits above £300k at 27.5% will get tax relief of 55% on their R&D expenditure. 

It is expected that the R&D tax credit for loss making companies will remain limited to around 25% of expenditure.  This will mean that the present figure of 14% tax relief for the R&D enhanced expenditure will be reduced to approximately 12% which is considerably less than the new lowest rate of corporation tax of 20%.

Further changes will hopefully apply from April 2012 after further consultation:

• The rule limiting a SME company’s payable R&D tax credit to the amount of PAYE/NIC liability will be abolished.  This will be good news for new high tech companies with R&D losses but not large payroll tax liabilities.
• The £10k minimum expenditure condition will be abolished for all companies.  This will be good news for very small companies who presently can’t claim but will have very little impact overall.
• Changes will also be made to the rules governing the provision of relief for work done by subcontractors under the large company scheme.

For further information on how your company could be affected by the Budget now and in the future, please ring Mark Evans on 01902 783172 or email mark@taxandgrants.co.uk