The Finance Bill (or to give it its full title the Finance (No 3) Bill 2010/11) was published this week.  This is often the time when we find out the true meaning of the sometimes vague comments in the Budget speech and in the ensuing press releases.  As far as R&D relief is concerned, however, there are no surprises at all this time.

The only piece of information that wasn’t properly announced at the time of the Budget last Wednesday is the rate of Credit for loss-making SMEs.  As I mentioned in my last post, I spoke with HMRC shortly after the Budget speech and was told that they expected the rate to be reduced to 12.5%; the Bill confirms this rate.  The effect of this rate reduction is that for 2011/12, loss-making SMEs with sufficient surrenderable losses will be getting a repayable credit equal to 25% of their R&D Qualifying Expenditure.  So, although the headline Credit rate is going down (from 14% to 12.5%), the increase in the rate of R&D relief (from 175% to 200%) means that such SMEs will actually get a very small increase in repayable credit for the same level of Qualifying Expenditure.  Next year, when the headline rate increases again to 225%, expect the Credit rate to be reduced to around 11% in order to maintain the State Aid limits.

This is an exciting time for SMEs.  The relief offered under this regime is extremely beneficial; for 2011/12, a SME paying CT at the full rate of 26% (as it will then be) can benefit by reducing its tax bill by an extra 26% of its Qualifying R&D Expenditure.  For a SME spending £1m on Qualifying R&D, that’s an extra £260,000 saved.

For a smaller SME, paying CT at the lower rate of 20%, the saving will be 20% of its Qualifying R&D Expenditure.  So, such a SME spending £500,000 on Qualifying R&D will save £100,000 with the R&D relief.  Of course, if that SME was loss-making, it could potentially get a cheque from HMRC for £125,000.

There’s been a lot of talk lately about “Tax Avoidance”.  Unfortunately, a lot of the talk is very emotive and I rather suspect that a lot of the people talking loudest are muddying the distinction between Avoidance (legal) and Evasion (illegal).  I’ve no intention of adding to the debate at this stage, other than to make it quite clear that claiming reliefs such as the R&D Relief is, frankly, neither Avoidance nor Evasion.  Too many people are put off claiming reliefs to which they are fully entitled, simply because they fear they will be treated as if they have done something wrong!

If you are doing “R&D” then claim the relief!

Finally (for now), on 24 March 2011, HM Treasury published a consultation document entitled Rebalancing the Northern Ireland economy.  One of the broad areas for consideration is devolving Corporation Tax powers to the Northern Ireland Executive.  Within this is the possibility of then using enhanced R&D Relief to further incentivise Northern Irish companies to conduct R&D.  This consultation document is open until 24 June 2011.