TaxPersonal Tax10 NOVEMBER 1999 RESEARCH & DEVELOPMENT BOOST FOR SMALL & MEDIUM-SIZED COMPANIES

10 NOVEMBER 1999 RESEARCH & DEVELOPMENT BOOST FOR SMALL & MEDIUM-SIZED COMPANIES

4,500 small and medium-sized companies next year will be eligible for new tax credits to encourage research and development and innovation.

4,500 small and medium-sized companies next year will be eligible for new tax credits to encourage research and development and innovation.

The tax credit package announced today substantially builds on the original proposals set out in Budget 99, by lowering the minimum threshold on spending for companies to qualify for tax credits from 50,000 pounds to 25,000 pounds a year, and by raising the maximum turnover limit from 11.2 pounds million to 25 pounds million a year.

Trade Secretary Stephen Byers said:
“Research and development combined with the successful exploitation of its results are crucial if we are to develop a knowledge driven economy. The new tax credit will help small and medium companies to develop, innovate and generate future growth which is key to the success of the economy.”
The tax credit package will include:
increasing the existing 100 per cent relief for current spending on R&D to 150 per cent; under this enhanced relief, the cash cost of R&D will be reduced by 30 per cent for a company benefiting from the small companies rate;
companies not yet in profit will be able to take the relief up front and reduce their cash cost of doing R&D by 24 per cent;
tax credits will be available for R&D carried out in and outside of the UK;
tax credits will be available to companies who have not yet started trading.

DETAILS

Tax Credits for Research and Development

1. In March 1999, the Inland Revenue published detailed proposals for tax credits in the technical note “Research and Development: New tax incentives for small and medium-sized businesses”. Under these proposals:
the tax credit will increase the 100 per cent relief for current spending on R&D to 150 per cent. So when added to the existing relief, the cash cost of R&D will be reduced by 30 per cent for a company benefiting from the small companies rate.
companies not yet in profit will be able take the relief up front. This will reduce their cash cost of doing R&D by 24 per cent.

These proposals were widely welcomed by business.

2. In the light of responses to the technical note, the Government has decided to make the following changes to the detailed proposals:
the threshold level of spending for companies to qualify for tax credits will be reduced from 50,000 pounds to 25,000 pounds a year;
the turnover limit for small and medium-sized companies will be raised to the highest possible level allowed under the EU State aid rules currently equivalent to #25 million rather than the annual turnover limit of #11.2 million proposed at the time of the Budget;
the proposal to limit tax credits to research and development carried out in the UK will be dropped;
the amount which may be claimed as a payment from the Exchequer will be limited to the company’s PAYE and National Insurance contributions for the period; and
tax credits will also be available to companies that have not yet started trading.

3. As a result of these changes, the number of companies that qualify for tax credits will increase from 3,500 to 4,500.

4. It is intended that the legislation will take effect from 1 April 2000. However, as the tax credit is a notifiable State Aid, the scheme will need to be agreed with the European Commission before it can be brought into operation.

Definition of Research and Development and Appeals

5. The way in which research and development is defined for tax purposes and appeals are handled will also be updated in the next Budget.

6. Most respondents to the technical note on “Research and Development: Definition and Appeals” published by the Inland Revenue in January 1999 wished to move away from the present system under which the definition and appeals are determined by the administrative decision of the Secretary of State for Trade and Industry. The draft guidelines in the note on the meaning of research and definition in the technical note were widely welcomed.

7. In the light of these responses, the existing definition will be replaced by a statutory definition supported by the draft guidelines. Jurisdiction for appeals will be moved to the tax Commissioners and the Courts.

Further consultations

8.The Inland Revenue will set up a consultative committee with representatives of business and the professions to advise on the introduction of tax credits and on the draft legislation.

NOTES FOR EDITORS

1. The proposals follow the publication of two technical notes earlier this year. These sought comments from business on various R&D related issues.

2. “Research and Development: Definition and Appeals” was published on 14 January 1999. It summarised the existing definition and reliefs for R&D, discussed how disagreements on the meaning of R&D might best be resolved, and introduced draft guidelines prepared with the DTI on the meaning of R&D.

3. “Research and Development: New tax incentives for small and medium-sized businesses” was published on 10 March 1999. It outlined the possible scheme for the volume-based R&D tax credit.

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