Who is likely to be affected?
1. Companies, especially small and medium-sized companies, carrying
on research and development (R&D). General description of the measure
2. R&D tax credits for companies that are small or medium-sized
enterprises (SMEs) were introduced in Finance Act 2000. Similar credits
for large companies, and a targeted relief aimed at R&D into
vaccines and medicines for the killer diseases of the developing
world, were
introduced in Finance Act 2002.
3. Following a consultation in 2003, proposals to simplify the
definition of R&D and to widen the range of qualifying costs
were announced at the Pre-Budget Report. These changes are now
being brought into
effect, representing a further Government investment in R&D
of £35
million per year. Operative date
4. For large companies changes will take effect from 1 April
2004.
5. For SMEs and for vaccines research relief, changes will
take effect as soon as State aids approval has been received.
They will therefore
commence from a date yet to be announced. Current law and proposed revisions
Definition of R&D
6. R&D is currently defined by legislation which applies the
DTI’s guidelines of 28 July 2000. On 5 March 2004 the DTI published
new guidelines (available at www.dti.gov.uk/support/rd_guidelines.htm)
which make the R&D definition easier to understand and use. The
new DTI guidelines were given effect on 11 March 2004 for company
accounting periods ending on or after 1 April 2004, although companies
may use
the new guidelines as an aid to interpretation of the previous guidelines.
7. As well as applying for the purposes of R&D tax credits and
vaccines research relief, this new definition of R&D also
applies for a number of other purposes including the various
investment reliefs
and R&D allowances. Range of qualifying expenditure
8. Broadly, expenditure qualifying for R&D tax credits
and vaccines research relief currently includes expenditure
on staff costs, consumable
stores, externally provided workers and in certain cases expenditure
on sub-contracted R&D.
9. As announced in the Pre-Budget Report, these categories
of qualifying expenditure are being expanded to include expenditure
on software,
power, fuel and water. The definition of consumable stores is
also being amended so that expenditure on consumable or transformable
materials
qualifies for relief. These extensions will widen the support
given to innovative companies and reduce the real cost of R&D.
10. Comments were invited on whether the range of qualifying
expenditure being introduced represents the direct costs of
R&D. The general
theme of representations was that all costs attributable
to R&D
should qualify for the tax credit. Implementation of this
would entail a cost of around £230 million a year and
may increase complexity, particularly for SMEs, by causing
companies to
undertake detailed allocations
of all their overheads.
11. The Government considers that at this time the most appropriate
way to support R&D is to give relief for the costs
which have the greatest incentive effect on the amount
of R&D done.
With the extension to software, power, fuel and water
the Government considers the qualifying
costs now represent those costs which have the greatest
incentive effect, and that to extend beyond those costs
is not justified at this time. Other changes
12. Announced separately today in Budget Note 36 are
details of changes to the rules for expenditure on
staffing costs. These changes correct
the inadvertent inclusion of benefits in kind as a qualifying cost.
13. Also detailed separately today in Budget Note
25 are changes to the R&D schemes as a consequence
of the introduction of International Accounting Standards
in 2005.
14. It was announced at the Pre-Budget Report that
the rules for large company sub-contracting would be
amended
to provide a generic
definition for qualifying bodies which will aim to encompass ‘Public
Sector Research Establishments’. This proposal will
be implemented after the Budget.
15. To support the changes being made in the Budget
and to reflect experience of claims made since introduction
of the schemes Inland
Revenue will produce improved guidance later in the year
followed by a programme to improve delivery of the
credit. Inland Revenue also
plans to issue regular information on R&D tax credits
in its publication of National Statistics.
Further advice
16. If you have any questions about this change,
please contact your local Inland Revenue tax office. www.inlandrevenue.gov.uk
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