Large companies can claim R&D tax relief using the ‘above the line’ expenditure credit – a tax credit on the amount of qualifying R&D expenditure. This method of obtaining relief for large companies was introduced on 1 April 2013 as an option, and will become mandatory on 1 April 2016. The rate of the above the line credit is currently 10% of qualifying R&D expenditure.
Small and medium sized companies claim relief for qualifying R&D expenditure by way of an enhanced corporation tax deduction, which is currently 225% of qualifying expenditure.
Qualifying expenditure is defined in the legislation, and includes expenditure incurred on staffing costs, software and consumable items (materials), and externally provided workers.
With effect from 1 April 2015 the rate of the above the line credit for large companies will increase to 11%.
The corporation tax deduction available to SMEs will be increased to 230% of qualifying expenditure with effect from 1 April 2015.
Qualifying expenditure on materials will be restricted with effect from 1 April 2015 to ensure that the cost of materials incorporated in products that are sold is not eligible for R&D relief.
Measures are to be introduced to streamline the application process for smaller companies investing in R&D. This will include an advance assurance scheme for small businesses making their first claim and new guidance for R&D tax credits. A consultation will be launched in January 2015 on the issues faced by smaller businesses claiming R&D tax credits.
These increases will further enhance the incentives available to innovative companies engaged in qualifying R&D, and will provide further assistance to companies seeking to make use of the relief.
The changes demonstrate the government’s commitment to innovation and improvement of the competitiveness of the R&D tax credit schemes.