October 29th, 2012 / Insight posted in

How will tax credit changes affect my cash flow?

HP writes: In last month’s budget the chancellor announced changes to tax credits. My company should be able to reclaim tax credits for research and development, but what will be the impact on its cash flow?

The chancellor announced an increase in the additional tax deduction on qualifying R&D spending. It will rise from 75% to 100% and then to 125% in 2012, writes Jon Sutcliffe, partner at Kingston Smith LLP. The increase to 100% is expected to apply from April 1. This is good news for small and medium-sized companies that are using the R&D enhanced relief to cut their corporate tax bills. Those paying corporation tax at the small companies’ rate will see their tax saving rise to 40% of qualifying spending.

Previously, R&D enhanced relief for small companies could be claimed at 14% of the 175% enhanced relief, allowing firms to reclaim 24.5% of spending that qualifies for R&D relief. The rate at which the reclaim is made has been reduced to 12.5% of the 200% enhanced relief, so firms will be able to reclaim 25% of qualifying spending. In other words, there is little change for businesses, like yours, that reclaim tax credits. The rise in the tax deduction to 125% next year may be accompanied by a reduction in the rate at which firms can reclaim tax. This is because of EU-imposed state-aid limits on the tax incentives the British government can give. The good news for smaller businesses is that the government has scrapped the condition that R&D spending must be at least £10,000 and that the R&D tax credit will be limited to the amount of payroll taxes that a company pays.