Pronovotech Ltd

There have been a number of changes – most of them very positive - to the R&D tax credit system in the UK in the last year.  Richard Lewis of Pronovotech looks at these changes and how they will affect technology companies.

Increase in rates

Last year’s Finance Act proposed increases in the amount of tax relief for R&D expenditure.  From 1 April 2008, large companies can claim an additional deduction from profits of 30% of qualifying spend, up from 25%.  This means that the benefit for a large company paying corporation tax at the full rate will increase from 7.5% to 8.4%, after taking into account the reduction in the tax rate from 30% to 25%.

An increase in the relief for SMEs from 50% to 75% was also announced but has not been given force yet since approval from the European Commission is needed for any amendments to the SME scheme, which is regarded as a State aid.  This will push the value of the relief up to 21% of R&D spend for a company paying corporation tax at 28%.  The payable credit for loss-making SMEs will also increase slightly from an effective 24% of qualifying R&D costs to 24.5%, again subject to EC ratification.

Extension of the SME band

Another welcome proposal, planned for some time, is a doubling of the turnover, total assets and employee limits for a company to qualify for the more generous R&D benefits for SMEs to €100m, €86m and 500 respectively.   Affected companies, amongst them loss-making companies that hitherto have been classified as large and hoping to be able to claim payable credits under the new definition, must still wait though as EC approval must be forthcoming.  It is hoped however that the increase will take effect from 1 April 2008.

Limit on relief available for single projects

As part of the negotiations with the EC for the approval to the SME scheme enhancements above, the Treasury has had to propose two measures placing a restriction on the relief in certain situations.  The first is an overall cap on the amount of tax benefit provided to an SME for a particular project at €7.5m, covering both payable tax credits and tax savings.  At around £5.9m at today’s exchange rate this equates to roughly £24m of R&D expenditure based on claims for the payable credit, so the number of companies potentially affected will be low.  Nevertheless some of the bigger R&D tax credit claimants – some of which could be based in Cambridge – will be reviewing the projects they have claimed the relief for and carefully considering the scope of future claims.

Denial of tax credits for companies not treated as going concerns

The second restriction resulting from the EC approval process is the prevention of claims for payable credits or tax relief under the SME scheme for companies whose accounts are not prepared on a going concern basis.  Clearly, the intention here seems to be to stop “throwing good money after bad” and is most likely to affect companies that go into administration.  In the past, a payable R&D tax credit has been the only recoverable asset for some ailing technology companies so this measure could have a considerable impact.  As it forms a change to the SME scheme (albeit an adverse one) it still requires EC approval so companies that might be affected by the new rules will want to get claims in before any they come into operation.

Reduction in time limit for claims to two years

In the past, companies claiming the additional tax deduction enjoyed a generous six year time limit for making claims.  It was announced as far back as March 2006 that the deadline would go down to two years from April 2008, so companies had ample notice to get claims submitted for past years.  “Even so, many left it very late – at Pronovotech we were still getting calls right at the end of March!” says Mr Lewis.   Now that the two year time limit is in place, companies need to consider R&D tax claims much earlier – it is no longer possible to put it off until the last minute and file a block retrospective claim.  Some very large companies that might have been prepared to pay premium fees in the past  just to get their previous years’ claims up to date, will now be looking to incorporate claims into their annual tax compliance process in a more cost effective way.

Despite the fact that R&D tax relief has been with us since 2000, there are still many companies who have not yet made a claim, perhaps due to not realising that they were eligible in the first place.  Even though the ability to go back six years has now disappeared, the ongoing benefits can be significant.  Changes to HMRC’s infrastructure for dealing with R&D tax relief in late 2006 have also led to a more consistent approach to handling claims but, as has always been the case, companies making claims need to make sure technical staff are involved in assessing eligibility and that the rules are properly understood.

About Pronovotech

Pronovotech is a Cambridge-based firm specialising in helping companies from start-ups to established multinationals optimise their R&D tax relief claims, combining a wide technology background with in-depth knowledge of the tax scheme.  From advice on discrete aspects of the scheme through to a fully managed claim project, Pronovotech is focused on providing superb quality, excellent service and value for money.  Contact Richard Lewis on 01223 235500 or e-mail Richard.lewis@pronovotech.com.