The Finance Act 2008 implemented the long awaited changes to the SME and Vaccine Research Relief (VRR) regimes, contained in Schedule 20 to Finance Act 2000 and Schedule 13 to Finance Act 2002, which have been the subject of the EC approval process for notified state aids.
As well as consolidating previously announced measures to increase both the benefit that can be claimed and the number of companies that can claim them, it also introduced measures that will restrict the ability of certain companies to take advantage of the SME relief. Given the very small number of claims for VRR this article concentrates only on the changes introduced for SMEs claiming the expenditure relief on research and development (R&D).
In outline, the main changes to the rules for SME companies claiming R&D relief, which all apply from 1 August 2008, are outlined as follows:
- The rate of relief is increasing
- The size limits defining an SME are doubling, enabling more companies to claim SME relief, which is more generous than that for large companies
- Companies in financial difficulty will no longer be able to claim the relief
- The amount of aid that can be claimed for an R&D project has been restricted to €7.5m
How much more relief
will be available to SMEs
SMEs will be able to claim tax deductions of 175% on their
qualifying expenditure (an increase from 150%). The small company rate of
corporation tax is in the process of rising by 1% per annum, from 19% for the
year ended 31 March 2007 to 22% for the year ended 31 March 2010.
Over this period the effective rate of benefit from R&D relief will increase from 9.5% to 16.5%. At the top rate of corporation tax (which decreased from 30% to 28% from 1 April 2008), the benefit has increased from 15% to 21%. Where the additional deductions brought about by the relief reduce profits in between the full and small company rates, the saving may be even greater due to the impact of marginal relief on effective tax rates.
The value of the cash credit available to SMEs, that have a surrenderable loss for tax purposes and have claimed R&D relief, will be reduced from 16% to 14% of the surrenderable loss (or, if lower, the amount deducted for R&D). Combined with the increase in the rate of relief from 150% to 175%, this gives a slightly larger cash credit amount of up to 24.5% of R&D expenditure (subject to the PAYE/NI cap) compared to 24% previously.
What size of company
now qualifies as an SME?
The previous definition of an SME for the purposes of the
R&D relief is based on EC Recommendation 2003/361/EC which states that an
enterprise must have fewer than 250 employees and either annual turnover not
exceeding €50m or gross assets not exceeding €43m.
These size limits are calculated after taking into account the figures of related companies. For expenditure incurred on or after 1 August 2008, these limits are doubled making the SME relief available to companies with fewer than 500 employees and a turnover not exceeding €100m or gross assets not exceeding €86m (again, subject to the inclusion of figures for various related companies as set out in the EU recommendation).
Those loss-making companies that were previously large but become SMEs under the new definition will now potentially be able to surrender their enhanced tax deductions for cash credits where appropriate. Two separate calculations will be required for any period straddling 1 August 2008.
Although this looks like good news, the large company and SME regimes do contain a number of fundamental differences that former large companies will need to take into account when calculating the relief. Depending on the facts, a company may find additional benefits are not as great as they may first appear.
How much will I be
able to claim for each project?
The changes have introduced a cap of €7.5m on the aid (NB
not the costs incurred), that can be given on a project over its lifetime. The
definition of a project will be as set out in the DTI guidelines of 5 March
2004, which is basically ‘a number of activities conducted to a method or a
plan in order to achieve an advance in science or technology'.
Whilst many companies will not have individual projects that are likely to breach this cap there are others, with long term, high cost projects, such as those commonly found in the pharmaceutical sector, where this may cause a loss of the SME relief, with only the large company relief (130% of qualifying expenditure) being available on the excess.
The calculation of ‘aid' is complex and ensures that the total R&D aid received over and above that which could have been available under the large company scheme does not exceed the €7.5m threshold. This means that companies will need to calculate and then track the aid per project, making calculations under both the SME and large company schemes which increases the complexity and the costs of claiming the relief.
My company is in
financial difficulty. Will it still be able to claim?
The new rules prevent companies whose latest accounts are
not prepared on a going concern basis from claiming the SME relief. If the
company's going concern status is only based on the expectation of it receiving
the SME, R&D or VRR relief then it will also not be able to claim.
This change has effect for claims made and amounts paid or applied by HMRC on or after 1 August 2008, so if a company has already received a payment from HMRC prior to 1 August 2008 then this will stand. There are no provisions for the large company relief to be claimed instead of the SME relief. Clearly this change will require the directors and auditors of companies in this position to examine their position carefully.
Are there any other
changes to the types of qualifying expenditure?
In addition to the above, the definition of staff costs has
been widened to include compulsory social security contributions paid by a
company in respect of benefits for staff under the legislation of another EEA
state or Switzerland. Following changes previously made to the large company
relief, those SMEs making payments to the subjects of clinical trials are now
able to claim for these if they are part of an eligible R&D project.
David Cobb and John Moore are part of the Deloitte R&D tax services team. For more information email dcobb@deloitte.co.uk or johnmoore@deloitte.co.uk
