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The Upcoming 2012 Budget

There have been a number of issues raised during the 2010 and 2011 HMRC consultations. A number of these issues are still subject to a further round of HMRC consultation (see our ‘2012 Consultation Update’ news article), but there are some significant changes that are to be finalised for the 2012 March Budget.

The vast majority of these changes are focused on the SME (Small & Medium Enterprise) market, but there are still some changes that will effect the large company market.

Some of the notable changes to be finalised for the 2012 Budget include:

Increased superdeduction rates – 225% for 2012.

The rate of additional uplift will be increased from the current 100% to 125% for expenditure incurred on or after 1 April 2012. The total Corporation Tax superdeduction for qualifying R&D expenditure will therefore be 225%. For a 20% CT rate company, this will produce a net cash benefit of 25%.

Lower surrender rates for SMEs claiming R&D tax credits in a loss-making situation.

The surrender rate for loss-making SME companies will be reduced to 11% from the current 12.5%. This has little effect to the net cash benefit, as the reduction is countered by the increase of the superdeduction rate (200% to 225%). The underlying reason for this reduction is to ensure that the scheme remains within the EU restrictions that state the value of the credits generated for loss making companies must not exceed 25% of the total expenditure.

Less restrictions for loss-making SMEs – especially where large sub-contractor costs are involved.

Previously, an SME company claiming R&D tax credits in a loss-making situation was limited to the total amount of PAYE/NIC liability within the company. Moving forward into 2012, this cap will now be removed.

This is great news for SMEs; loss-making companies that have low PAYE and NIC liabilities, but large third party R&D costs, may now have a valid R&D claim in 2012.

Micro-SMEs can now claim.

The draft legislation removes the requirement for a company to spend at least £10,000 on qualifying R&D before it able to make a claim. This will inevitably benefit ‘micro’ companies performing eligible R&D. HMRC have also designed some new ‘pre-qualify’ processes so that they have an early involvement in the claim process – LinkStep would advise potential claimants to engage with us throughout this process. We have a number of tailored approaches that can meet the requirements of even the smallest claim.

HMRC are relaxing the tests for certain types of contractor arrangements.

The externally provided worker (EPW) rules were introduced into the research and development regime to deal with outsourced workers. The legislation relies on a “tri-partite test”, but this presents problems, particularly when workers using personal service companies are secured through an agency. HMRC are in the midst of developing some new rules for the 2012 Budget that should relax these rules. This is particularly relevant to companies hiring IT contractors who operate through their own limited companies as well as a staffing agency.

Clarification of R&D in ‘production environments’

The meaning of production for the purposes of R&D tax credits has been the subject of much disagreement and debate with HMRC over the past few years. While it is accepted that production is not R&D and expenditure on it does not, therefore, qualify for tax relief or R&D credits, the boundaries of what does constitute R&D and what commercial production have not been clear. The distinction is particularly difficult when dealing with the development of prototypes that operate production/commercial environments, or development in manufacturing production lines where test runs or trials are required.

HMRC has published some draft guidance which addresses some of these issues. This is also available on the HMRC website at: http://www.hmrc.gov.uk/consultations/production-guidance.pdf