7th June 2012

Broomfield & Alexander Advice: Encouraging Innovation through the Tax System

Encouraging innovation through the tax system

Since the Research & Development (“R&D”) tax relief scheme was introduced in 2000 it has undergone many changes.  However, the underlying objective of these changes has remained the same – to encourage innovation.

An SME (generally a company with less than 500 employees) can now claim tax relief equivalent to 225% of its R&D spend.  For example, if a company spends £100,000 on R&D activities it can claim tax relief of £225,000, thereby potentially reducing its tax liability by an additional £30,000.

In addition, a loss making SME has the option to claim a tax free cash sum from HMRC.  This cash option has, for years, provided an invaluable source of funding, with approximately 25p in the pound potentially claimable (i.e. up to £25,000 of actual tax free cash could be claimed from HMRC for an R&D spend of £100,000).

In the recent budget the Government reconfirmed its commitment to introduce an “above the line” R&D tax credit for large companies.  For this change to be implemented, it has been proposed that loss making large companies will be able to claim a tax free cash receipt (as with the SME scheme) with effect from April 2013.

This proposed change is also likely to benefit many SMEs.  Currently SMEs in receipt of funding (be it through grants or customer funding), or those carrying out R&D activities on behalf of others, face restrictions in claiming R&D tax relief under the SME scheme.  However, they are generally able to claim under the large company scheme.  This entitles the company to claim a 130% tax deduction (even for the expenditure that has been funded) but with no cash option where the company is loss making.  With effect from next April however these loss making SMEs are likely to have the option to claim a tax free cash sum from HMRC.

In addition, the Government has issued further guidance on the patent box tax regime to be introduced in April 2013.  This will allow companies to elect to apply a 10% corporation tax rate to a proportion of profits attributable to patent and certain other qualifying intellectual property.

For more information please contact Broomfield and Alexander