In the Budget the Chancellor has announced increases in the amounts of R&D tax credits but should all technology companies welcome this year's budget or will some be disappointed?
The fact that many companies will no longer qualify as eligible investments for Enterprise Investment Scheme investors and for Venture Capital Trusts together with the increase of 3% in the small companies' rate of corporation tax could cause difficult times for growing companies in this sector.
Research and Development (R&D) Tax Relief
Size limits for companies claiming Small and Medium Enterprise (SME) relief will be increased
The limits on companies qualifying as SMEs for the purposes of R&D tax credits will be doubled so that SMEs will be companies with fewer than 500 employees which have;
- an annual turnover not exceeding €100 million; and/or
- a balance sheet total not exceeding €86 million. The increased limits are subject to state aid approval from the European Commission and will not come into force until after that approval has been obtained. The increased limits are to be welcomed and will mean that more companies will be able to benefit from the higher rates of R&D tax credits available to SMEs.
Increased rate of relief for SMEs
For the SME R&D tax credit scheme, the rate of relief will increase from 2008/9 to 175% (from 150%) for companies incurring qualifying expenditure.
Although the main rate of corporation tax will be reduced to 28%, the Chancellor also announced a staged increase in the small companies' rate of corporation tax from the present rate of 19% to 22% by 2009/10. This will reduce the benefits of the R&D tax credit under the SME scheme although, overall, SMEs incurring R&D expenditure should still be better off.
The SME scheme can result in a payable tax credit, which benefits loss making companies which would not otherwise benefit from the tax credit as they would not have tax liabilities to be offset by the credit. More companies may qualify for this payable tax credit by virtue of falling within the SME definition. However, the amount of the payable tax credit will continue to be restricted to its present level of 24% of qualifying expenditure.
Increase in rate of relief for large companies
Tax relief for large companies undertaking qualifying R&D activities will be increased from 125% to 130%. The increase will take effect from 2008/9. At the same time the rate of corporation tax for large companies will be reduced to 28%.
The Chancellor announced some fundamental reforms of the capital allowance system to take effect from 2008/9. These include abolishing industrial buildings allowances, reducing the writing down allowance on plant and machinery from 25% to 20% and introducing a new annual investment allowance for the first £50,000 of expenditure on plant and machinery. A new tax credit for losses resulting from capital expenditure on certain designated green technologies will be introduced from 2008/9.
In the meantime the temporary 50% rate of first year allowances for small enterprises will be extended to the 2007/8 tax year.
It is not clear whether the generous allowance of 100% for assets used in R&D activities will be affected by the proposed changes to the capital allowance regime.
EIS and VCT reliefs
The Budget has made it harder for young and growing technology companies to raise funds through the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).
The Government has been obliged to make a couple of changes to the conditions for EIS and VCT investments in line with EU state aid provisions:
- investee companies or groups may have no more than 50 full time employees at the date of issue of shares to investors; and
- an investee company may receive no more than £2 million in aggregate from VCTs, EIS and the corporate venturing scheme in any 12 month period.
These changes will apply to VCT money raised after 5 April and to EIS shares issued after Royal Assent (probably some time in July). AIM companies often benefit from EIS and VCT investments and so are likely to be affected.
In addition some minor relaxations have been made to the complex conditions for relief under the schemes. These include increasing the period in which an EIS company has to invest 90% of the funds raised, from 6 months to 12 months.
- Welcome changes will increase the rate of R&D tax credits and increase the number of companies eligible for the more generous SME relief
- However, the increases in the small companies' rate of corporation tax will reduce the benefit of the increased R&D tax credits for smaller companies.
- Major changes to the capital allowance system are proposed for 2008/9 including:
- the replacement of first year allowances for small and medium-sized businesses by an annual investment allowance of £50,000 a year; and
- writing-down allowances for plant and machinery will be reduced from 25% to 20% for all companies; but the 50% enhanced rate of first year allowances for small companies will continue for 2007/8.
- New conditions for EIS relief and VCTs will mean many growing companies will no longer be eligible investments and so will lose this potential source of funding.
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