With the Chancellor of the Exchequer's March and Summer Budget now behind us, it is important to take a look at the changes that will take place with regards to R&D tax credits, and what those changes mean for companies both large and small.  Much of what was mentioned in the March Budget had already been announced in the Chancellor's Autumn Statement, specifically with relation to the announcement of a 5% increase in tax relief for the Small & Medium Enterprise Scheme, and restrictions on what constitues qualifying R&D expenditure with regards to the cost of materials used for products.  These changes went into effect in April 2015.

What is important though is what is yet to come.  HMRC plans to introduce voluntary advanced assurances, in relation to claiming R&D tax credits, particularly for smaller businesses, which will last for three years.  Such an advance assurance scheme (similar to the SEIS and EIS advance assurance scheme) will enable companies to go forward with their required research, without having to worry whether their expenditure will ultimately qualify for the tax credit at the end of the tax year.  HMRC is also planning to offer small companies additional guidance on applying for R&D tax credits.  These amendments to the regime will reduce any uncertainty faced by small companies that want to pursue R&D, but may not have the resources, know-how, or time to assess the applying for the credits.

The Chancellor also introduced some minor changes in the Summer Budget, the most material of which appears to be the tightening of a loophole that allowed universities and charities to also apply for the Research and Development Expenditure Credit ("RDEC").  In addition to the release of the Summer Budget, another document was expected to be released this summer on this subject.  The March Budget stated that "HMRC will publish a document in the summer of 2015 setting out a road map for further improvements to the scheme over the next two years."  It is important that businesses look to this document for the latest information that would be useful in order to assess their R&D programmes and how they can benefit from the credits.

Now is a good time for large businesses to consider moving from the regime's "large company scheme", which will cease in April 2016 to the parallel RDEC.  The RDEC will offer a higher tax benefit compared to the large company scheme.  Companies should enquire about this credit now, in order to understand the accounting and reporting requirements.

The continued focus given to R&D tax regimes by the UK government only reinforces the government's commitment to supporting innovation within the country's shores.  The most recent data by the Office of National Statistics from 2012 shows that R&D spending decreased to 1.72% of GDP (£27 billion) from 1.77% the year before, which is below the European average of 2.06% and far below the government target of 2.5% by 2014 (UK Gross Domestic Expenditure on Research and Development 2012).  However, the amount of R&D Tax Credit claims have increased by 26% in 2012-2013 (15,940), from the prior year as per the HMRC Research and Development Tax Credit Statistics.  This resulted in an increase of £1.2 billion in R&D expenditure used to claim R&D tax credits, which led to an increase of £200 million in total support claimed for a total of £1.4 billion.  Such an increase seems to reinforce the importance of the R&D tax credit scheme in the government's efforts to promote innovation.

It is also important to take into consideration the European Commission's position on R&D tax credits.  The Commission published a report in 2014 on R&D tax incentives within the Eurozone, concluding that R&D tax incentives have a significant effect on business growth.  The UK R&D tax credit did not rank first, but was praised for its good practice.  In addition, the Commission's Europe 2020 program has a goal of increasing R&D spending to 3% of GDP by supporting member states with research into possible changes.

Given the UK government's continued success with R&D Tax Credit schemes and its commitment to improving them, as exemplified in the March Budget, R&D spending is bound to increase and bring additional growth the industry in the UK.  Due to the importance of R&D in the growth of a business, and the support offered through the credits, it is crucial that business owners take some time to assess whether they can avail of them.  We would be pleased to help anyone in further understanding this topic and in particular can assist with advance assurance applications to HMRC.  Speak to us, we are happy to help.