October 30th, 2012 / Insight posted in

The future of the R&D tax credit

As part of an attempt to increase UK tax competitiveness the Government has launched a consultation on the future of Research and Development Tax Credits.

For many companies R&D tax credits have become a vital part of the funding mix although there are still many companies out there that are conducting R&D but are not taking advantage of the tax incentives available to them.

Reassuringly for technology businesses it is clear that the R&D tax credit in some form is here to stay.Research has shown that innovative businesses generate more new jobs than businesses which do not invest in innovation and as the UK emerges from recession job creation is very high on the political agenda.

The consultation is more about reviewing whether the R&D scheme is focussed on the right type of investment and the right type of business.

Three quarters of claims for R&D relief are made under the SME scheme (which allows a 175% super-deduction for R&D expenditure which can be converted into a paid tax credit if the company is loss-making) howeverthis only accounts for one quarter of the cost of the scheme to the Treasury with large company claimants costing far more.

Concern has also been expressed that companies that are not ‘technology businesses’ are able to claim the credit.

Our expectation is that changes to the scheme arising from the consultation will be minimal.

The recent closure of the Pfizer research and development facility in Kent has underlined the importance of retaining large company investors in R&D in the UK and any whiff of uncertainty over the future of the relief may well persuade other companies to look abroad.

On the other hand the widely held belief that SMEs will be the engine of growth as the UK comes out of recession makes it extremely unlikely that incentives to smaller businesses will be reduced.

Against this background HMRC have made clear that any changes to the scheme must be tax neutral so if we are continuing to support both large and small companies alike changes to the scheme or rates of relief will be minimal.Such changes as there are will probably not kick in until April 2012 at the earliest.

That said, companies should be aware that as headline corporation tax rates start to fall from April 2011 the absolute value of R&D relief will fall as they save tax at lower rates.

We also continue to meet businesses that have missed out on valuable relief by failing to make claims even though the work they are doing meets the criteria. We can only back-date claims by a maximum of two years so it is vital that any business investing in new technology or processes takes advice to determine whether it can benefit.

We will be keeping a close eye on any further developments surrounding this matter, so watch this space!