Budget Notes

BN05 AMENDMENTS TO THE RESEARCH & DEVELOPMENT AND VACCINE RESEARCH RELIEF SCHEMES

Who is likely to be affected?

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

General description of the measure

2. Budget 2007 announced a package of business tax reforms which included an increase in the rate of R&D relief for all companies. Legislation will be introduced in Finance Bill 2008 to increase the rate of relief under the small and medium company (SME) scheme from 150 per cent to 175 per cent. The rate of relief under the large company scheme will be increased from 125 per cent to 130 per cent.

3. The UK's SME R&D and VRR schemes are notified State aids and must comply with European Commission (EC) Guidelines before approval will be granted for the rate increase, and other recent amendments. In order to achieve this, the UK is amending the schemes to prevent companies whose most recent accounts are not produced on a going concern basis from claiming relief. A cap is also being introduced to restrict the amount of relief available under the SME or VRR schemes to €7.5 million per R&D project. Large companies will have to make a declaration concerning the incentive effect of the relief they are claiming under the VRR scheme.

Operative date

4. This measure will have effect from a date to be appointed by Treasury order. The Government is currently in discussions with the EC to ensure that the proposed amendments meet with EC State aid approval rules. The appointed date will be announced once approval has been received.

Current law and proposed revisions

5. Schedule 20 to the Finance Act (FA) 2000 provides for tax relief for small and medium companies undertaking qualifying R&D activities. A 50 per cent enhancement of qualifying expenditure can be claimed under the scheme and in some circumstances this can lead to a payable credit.

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

7. 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 per cent enhancement of qualifying expenditure and in the case of small and medium companies can result in a payable tax credit.

8. Legislation to be introduced in Finance Bill 2008 will increase the rate at which relief will be available under the R&D schemes. For SMEs the rate will increase from 150 per cent to 175 per cent and for large companies the rate will increase from 125 per cent to 130 per cent. New conditions will also be added to the SME and VRR schemes. The first of these will prevent companies whose most recent accounts have not been prepared on a going concern basis from claiming relief. The second introduces a cap of €7.5 million on the amount of relief available per R&D project under the SME and VRR schemes, and the third introduces a requirement that large companies claiming VRR make a declaration as to the incentive effect of the relief.

9. In order to ensure that the SME and VRR schemes remain consistent with State aid requirements, the amount of relief available under the VRR scheme will be reduced for all companies from 50 per cent to 40 per cent.

Further advice

10. If you have any questions about this change, please contact Lynn Carroll on 020 7147 2636 (email: lynn.carroll@hmrc.gsi.gov.uk) or Peter Faherty on 020 7147 2700 (email: peter.faherty@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk