Autumn Statement 2014 - R&D Tax Incentive Measures

Published: Wednesday 3 December 2014

The 2014 Autumn Statement proposes several changes to the system of tax incentives for expenditure on Research and Development (‘R&D’) by companies.

Increase in rate of R&D tax incentives

As announced by the Chancellor in his speech, the level of R&D tax incentives is set to increase for expenditure incurred from April 2015 onwards, which should receive a warm welcome by innovative businesses.

Companies claiming R&D tax incentives under the SME (‘Small and Medium-sized Entities’) scheme will be able to claim additional tax relief of 130% of qualifying expenditure, an increase of 5% on the current enhancement of 125%.  This means that the cash effect for most profitable companies claiming under this scheme will effectively be a total ‘subsidy’ from HMRC of approximately 26% of qualifying R&D expenditure (in addition to the ‘normal’ corporate tax relief), a 1% increase on the current level.

The impact on ‘payable R&D credits’ for loss-making companies claiming under this scheme is not clear from the published documents.  Currently, under this scheme, companies may surrender enhanced R&D tax losses for a payable credit worth almost 32.6% of qualifying expenditure in cash terms.  Historically, when the headline rate of enhanced R&D tax relief under the SME scheme has been increased, the rate of payable credit has been correspondingly reduced to maintain the overall cash effect for companies surrendering R&D tax losses.  It is not explicitly indicated whether such adjustment will be made on this occasion, although the overall cash effect would only be approximately 0.7% of qualifying expenditure.

Since 1 April 2013, large companies (and SMEs claiming under the large companies scheme of R&D tax incentives) have been able to claim an ‘above the line’ R&D credit, also known as the R&D Expenditure Credit.  This credit is currently 10% of qualifying R&D expenditure, although the credit is itself subject to corporation tax.

The Chancellor announced in his speech that the R&D Expenditure Credit will be increased by 1% to 11% of qualifying R&D expenditure.  This should further encourage large companies to elect early for the R&D Expenditure Credit in preference to the alternative ‘large companies’ scheme of enhanced R&D tax relief before the latter is abolished on 1 April 2016.

Changes to qualifying R&D expenditure

The increase in rate of R&D tax incentives will be partly paid for by a restriction on expenditure qualifying for the incentives, to ensure that they are more targeted.  From 1 April 2015, expenditure on R&D materials incorporated into products that are ultimately sold will not be eligible for the R&D tax incentives.

Assistance for smaller companies

A consultation will be launched in January 2015 with a view to helping smaller companies with some of the issues that they face in the process of claiming R&D tax credits.  Proposals include the introduction of an advance assurance procedure for such companies, together with improved guidance on the scheme.