The UK government has announced plans that will impact on the tax relief companies can claim in respect of research and development (R&D).

In this regard, the UK Chancellor, George Osborne, recently delivered his final Autumn Statement before next year’s general election.  He had both good and bad news on the R&D tax credits which are available to companies that have to pay UK Corporation Tax.

In recent times the UK government has pledged to support the commercialisation of innovation, not just through the provision of R&D tax credits, but also by the introduction of the Patent Box scheme, as well as various funding initiatives.  R&D tax credits came about back in the early 2000s, initially only benefitting small and medium sized enterprises (SMEs) carrying out R&D, but with a scheme for larger companies being introduced shortly afterwards.  Of course, the systems have gone through several changes, and Mr Osborne is now pledging to increase the tax relief that companies can claim.

The changes will come into effect on 1 April 2015, and are good news for companies active in R&D who may, as a result, be able to increase their R&D capabilities and grow commercially.  It is also hoped that the increased rates of credit will attract overseas businesses to conduct their R&D in the UK.

The amount of tax relief available is dependent upon the size of the company.  SMEs can currently benefit from a tax relief rate of 225% of qualifying R&D expenditure, but this is set to increase to 230%.  That is to say, for every £100 of qualifying spending a company’s income on which Corporation Tax is payable is reduced by an additional £130 on top of the £100 spent.

Larger companies can, for the time being, choose between two schemes.  Under the older “super-deduction” scheme, companies can benefit from a rate of 130% (where, for every £100 of qualifying expenditure, the income that is subject to Corporation Tax is reduced by an additional £30 over the £100 spent).  No change to this was announced by the Chancellor, although this scheme will not be available for too much longer.  As of 1 April 2016 it will be withdrawn and only the other scheme – the R&D Expenditure Credit (RDEC) – will be available.  Under RDEC a company can receive an amount of relief that equates to a percentage of the company’s qualifying R&D spending.  The good news is that under the announced changes this percentage is set to increase, from 10% to 11%.

But, having given with one hand, the government plans to take with the other.  Of course, the additional finances required to fund the proposed rate increases have to come from somewhere.  To achieve this, the government is changing what is meant by “qualifying expenditure”. Once the changes are implemented the cost of materials incorporated in products sold will no longer count.  This applies to all three schemes. 

The impact this will have on businesses will depend on how they spend their money.  On the one hand, companies that invest heavily on consumable items, for example, will feel the blow, and new start-ups may be particularly affected.  On the other, some people are of the opinion that the small percentage increases provided will not have that much of an effect. 

The government does, however, seem committed to encouraging innovation, as additional funding has also been pledged for science and research programmes and a new Catapult network.  Draft legislation is due shortly, and should provide more details on the changes.