Section 20 Schedule 3: Relief for Expenditure on R&D
Summary
1.Section 20 and Schedule 3 amend Part 13 of the Corporation Tax Act 2009 (CTA) to make a number of changes to research and development (R&D) relief for both small or medium (SME) and large companies.
Details of the Schedule
2.Paragraph 2 of the Schedule increases the rate of the additional deduction for R&D expenditure provided by section 1044 CTA 2009 from 100 per cent to 125 per cent for SME companies.
3.It also increases the relief for pre-trading expenditure claimed as a deemed trading loss by a corresponding amount and reduces the rate of payable tax credit for a SME to 11 per cent of the surrendered loss.
4.Paragraphs 3 to 8 remove, for both SMEs and large companies, the £10,000 per annum minimum R&D expenditure.
5.Paragraphs 9 to 14 clarify that a company in administration or liquidation is not a going concern for the purposes of SME R&D relief and Vaccine Research Relief.
6.Paragraph 15 removes the restriction, to the level of the company’s PAYE and NIC liabilities, of the amount of tax credit a SME company may claim.
7.Paragraphs 16 to 32 abolish Vaccines Research Relief (VRR) for SMEs.
8.Paragraph 33 extends both the definition of “externally provided worker” in section 1128 and the qualifying expenditure allowable on “externally provided workers” in section 1129 of CTA 2009. It removes the previous restriction where relief could only be claimed in contractual arrangements involving three parties and applies in both connected party and unconnected situations
Background Note
9.Additional tax relief for expenditure on R&D was introduced in 2000 for SME companies and in 2002 for all other companies. Further relief - VRR - was introduced in 2003 for expenditure into vaccines and medicines for strains of TB, malaria and Aids/HIV prevalent in the developing world.
10.A consultation document "Corporate Tax reform: delivering a more competitive system" was published on 29 November 2010 on the HM Treasury website and included consultation on the R&D tax relief. A response document, "Research and Development Tax Credits: response and further consultation" was published on 10 June 2011, and a further response on 6 December, both on the HM Treasury website.
11.Budget 2011 announced increases to the rate of SME R&D relief, together with abolition of the PAYE/ NIC limit and £10,000 pa minimum expenditure.
12.The SME R&D Relief currently gives an additional deduction equal to 100 per cent of the qualifying expenditure. This, combined with the normal deduction for such expenditure, gives a total of 200 per cent.
13.Losses arising from expenditure on R&D can be surrendered by a loss making company in return for a payment at a rate of 12.5 per cent. giving relief of 25 per cent on the original expenditure.
14.The rate of the additional deduction is to be increased to 125 per cent for expenditure incurred on or after 1 April 2012. The rate at which losses can be surrendered will be reduced to 11 per cent, giving relief overall worth 24.75 per cent of the R&D expenditure. The reduction is necessary to keep the value of the relief within the 25 per cent. threshold set out in EU State aid rules.
