Finance Bill Tracking Service 2007 | Budget 2007 | Budget Notes

BN05 Extension of the small and medium enterprise (SME) Research and development tax relief scheme to include mid-sized companies

Who is likely to be affected?

1   Companies making claims to relief under the Research and Development (R&D) tax relief schemes.

General description of the measure

2   The Government intends to increase the support available under R&D tax credits. The rate of relief for large companies will increase to 130% of qualifying R&D expenditure. In the case of the SME R&D tax credit scheme, the rate of relief will increase to 175% for companies claiming enhanced deductions against profits. The value of the payable credit available will remain broadly at its current value (24% of qualifying expenditure). The Government intends to legislate these changes in Finance Bill 2008. Changes to the SME scheme will be subject to state aid approval from the European Commission.

3   Legislation will be introduced in Finance Bill 2007 to extend the support available under the SME R&D relief scheme to companies with fewer than 500 employees.

4   The Government also intends to make a minor amendment to the Vaccine Research Relief scheme in order to correct an unintended error in the legislation.

Operative date

5   The extension of support available to companies with fewer than 500 employees will have effect from a date to be appointed by Treasury Order. The Government is currently in discussions with the European Commission to ensure that any extension to the SME scheme meets with EC state aid approval rules. The appointed date will be announced once approval has been received.

6   The amendment to the Vaccine Research Relief Scheme will have effect on and after 1 April 2007.

Current law and proposed revisions

7   Schedule 20 to the Finance Act 2000 provides for tax relief for small and medium companies undertaking qualifying R&D activities. A 50% enhancement of qualifying expenditure can be claimed under the scheme and in some circumstances this can lead to a payable credit. A company is small or medium if it has fewer than 250 employees and an annual turnover not exceeding  50 million and/or a balance sheet total not exceeding  43 million.

8   Schedule 12 to FA 2002 provides for tax relief for large companies undertaking qualifying R&D activities. Large companies can claim a 25% enhancement of their qualifying expenditure under this scheme.

9   Schedule 13 to FA 2002 provides for tax relief for companies of all sizes carrying out vaccine research (vaccine research relief). The relief is in the form of a 50% enhancement of qualifying expenditure and in the case of small and medium companies can result in a payable tax credit.

10 The new rules, which will be included in Finance Bill 2007, will extend the more generous support available (the 50% enhancement and the payable credit for loss making companies) under the SME scheme to companies with fewer than 500 employees which have an annual turnover not exceeding £100 million and/or who have an annual balance sheet total not exceeding £86 million.

11 In order to ensure that the schemes remain consistent with state aid requirements, there will be a restriction to prevent companies who are not SMEs within the 2003 EC Recommendation from claiming a payable tax credit under both the SME R&D scheme and the vaccines research relief scheme in respect of the same expenditure.

12 The vaccine research scheme is intended to give an additional 50% deduction on top of the normal R&D relief. However, at the moment, the legislation potentially allows relief, under certain limited circumstances, of an additional 150% deduction. This is in excess of the amount intended.

13 The vaccine research legislation at Schedule 13 to FA 2002 will be amended to correct this unintended error.

Further advice

14 If you have any questions about this change, please contact Lynn Carroll on 020 7147 2636 (email: Lynn.Carroll@hmrc.gsi.gov.uk) or Jeremy Sherwood on 020 7147 2589 (email: Jeremy.Sherwood@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk