Research and development and tax credits

The Finance Bill contains a number of changes to the R&D and tax credit regime, all of which effectively operate as extensions to the current regime.

  • There is to be an extension of the definition of ‘staffing costs’ covered by the credit. Currently the definition concentrates on staff employed by the taxpayer company carrying out the research and development and does not include independent contract or agency staff. The proposals now include the costs of these workers. Currently, if an employee spends less than 20% of their time on research and development the company cannot recover their costs, and if the worker spends more than 80% of their time on research and development the company can recover 100% of their costs. This rule is to be abolished in favour of a simple apportionment of the relevant staff costs.
  • Extensions of the large companies’ rules to small and medium sized enterprises (SMEs) is a welcome move. This is intended to benefit SMEs which are unable to receive the current SME credit, defined as a state aid by the European Commission, if they receive other state aids such as grants of one kind or another. In these circumstances the enterprises will be covered by the large companies’ tax credit which is not a state aid.
  • There is to be a consultation shortly on other changes which it is hoped will extend the definition of qualifying assets for these purposes, to reflect technological developments, focussing on issues such as: the development end of R&D, innovative elements of design, the uniqueness of the R&D being undertaken, software development and how best to define ‘consumable stores’. The consultation will also consider the detail of how to implement a planned extension of the R&D definition to include work on ‘short life, advanced software’.

The operative date for these rules in respect of large companies is 9 April 2003. The changes for SMEs require approval from the European Commission and the effective date is therefore to be announced.

The minimum annual expenditure in order to claim the R&D tax credits is to be reduced from £25,000 to £10,000 in a year. The regime allows SMEs to claim tax relief for 150% of their qualifying expenditure and allows large companies to claim 125% of their qualifying expenditure.

The relief has until now mainly benefited large pharmaceutical companies. However the reliefs are now expected to give a significant boost to life sciences, vaccine research and treatment developers, the smaller end of the engineering industry and possibly the high-tech embedded technologies industry, depending exactly on the scope of the development to fall under the extended relief. This will not be clear until further details are made available, but in order to maximise opportunities planning at this stage will be essential.