Tax relief for research and development - changes to the regime

Monday 4 August 2008

Changes to the tax relief regime for research and development (R&D) expenditure were introduced by the past three Finance Acts and have now come into effect. What are the changes and when are they effective from?

What is R&D tax relief?

Companies can claim enhanced tax relief for certain costs on qualifying research and development. The availability and amount of relief will depend on the size of the company (whether it is a small and medium sized enterprise (SME) or a large company) and on the type of costs incurred.

What changes have been made?

Changes have been made to the R&D tax relief regimes for both SMEs and large companies. The changes, that were introduced by Finance Act 2006, Finance 2007 and Finance Act 2008 have all now come into force.

R&D tax relief

The amount of relief available has increased for both SMEs and large companies.

For SMEs the relief has increased from 150% to 175% for expenditure incurred on or after 1 August 2008. For large companies (those that are not SMEs and SMEs in certain circumstances) the relief has increased from 125% to 130% for expenditure incurred on or after 1 April 2008.

The SME qualifying conditions

The qualifying limits for a company to qualify as a SME were doubled with effect from 1 August 2008 so that broadly, a company is a SME if it (together with any company in which it holds 25% or more of the capital or voting rights) has:

• fewer than 500 employees and either
• an annual turnover not exceeding €100 million or
• an annual balance sheet total not exceeding €86 million.

The increase is effective for expenditure incurred on or after 1 August 2008.

Finance Act 2008 introduced two new conditions, effective from 1 August 2008, that need to be met for expenditure to qualify under the SME regime.

The new qualifying conditions are that:

• the latest published accounts were prepared on a going concern basis, and nothing in those accounts indicates that they were only prepared on that basis because of an expectation that the company would receive R&D tax relief or R&D tax credits
• the R&D aid on a single R&D project does not exceed €7.5 million.

If the €7.5 million cap is exceeded then the excess expenditure can qualify for relief under the large company regime.

Finance Act 2008 also made changes to some of the categories of qualifying expenditure that attract R&D relief. This extended the qualifying expenditure on staffing costs to include not just National Insurance but also the equivalent in other European Economic Area countries (and Switzerland).

Ann Minson, Senior Manager at Grant Thornton says: "The increase in the thresholds means that more companies will qualify for the more generous rate of relief under the SME regime. The increase in rates also means that the relief becomes even more worthwhile and companies should seek professional advice if they believe they may be entitled to make a claim."

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