Contractors' Questions: Will Osborne's R&D relief hike help Plan B?

Contractor’s Question: It seems that last month’s Budget contains some good news for my Plan B. With effect from 1 April 2012, I understand that the rate of R&D tax credits for small and medium enterprises (SMEs) will increase from 200% to 225%. As a one-person limited company, am I likely to be able to benefit? It also says in the Budget that the limit of SME payable credit, based on their PAYE/NICs liability, will be removed; what does this mean? I do know that the £10,000 minimum expenditure requirement has been removed too, so does that mean any amount can qualify/be spent?  

Expert’s Answer: R&D tax credits have been around for some time now, and there are two separate schemes for claiming relief – one for SMEs (Small and Medium sized Enterprises) and one for large companies. The increase in relief that you mention applies to the SME scheme. SMEs are independent companies with fewer than 500 full-time employees and either an annual turnover of up to €100million or a balance sheet not exceeding €86million. It works in the following way:

1. Your company needs to be carrying on qualifying R&D. The DTI published some time ago their definition of R&D and there are many discussions on what this means. It boils down to an ‘appreciable advance in the field of science or technology which was not known to a competent professional, and which benefits the trade of your company’; quite a mouthful. But it’s there as a definition to limit people from trying to claim routine bug fixing and product development.

2. You need to be incurring qualifying costs. These are mainly staff costs, but also contain computer software and consumable items used in the R&D function. You also need to have paid for these costs - receiving a payment from someone else to cover costs may deny the company the benefit of R&D.

3. The company can then multiply its R&D qualifying costs by 225% and deduct this figure from its income.

4. If the resulting figure is a loss, it may be surrendered to HM Revenue & Customs who will pay an amount of cash back. This cash back was previously limited to the amount of PAYE and NIC that you had paid in the year, but this restriction has now been lifted. The actual amount you receive is limited to 11%, so you might be better off to carry the loss forward and get relief at between 20-25%.

It’s probably best to illustrate the relief with an example. If a company’s income was £200,000 and £100,000 was spent on qualifying R&D activities and expenditure, then (ignoring other expense) the relief would work as follows:

Possibility to surrender the loss for an 11% refund, i.e. 25,000 *11% = £2,750 cash back

Overall, for the majority of contractors, the relief will not apply as they will struggle to meet the qualifying R&D activity or expenditure tests, but for those that do it may be a valuable relief.

The expert was Paul Spindler, partner at Kingston Smith LLP, the top 20 accountancy firm.