R&D Budget update: A manufacturing perspective
Manufacturing companies should be pleased with the number of favorable changes to the R&D tax relief regimes for both Small & Medium sized Enterprises (SMEs) and Large companies introduced by the 2007 Budget and discussed in more detail below. The extension of the criteria used to define an SME was expected and should enable a number of medium sized manufacturing companies, particularly those that are loss making but were just outside the current SME criteria, to take advantage of the more generous SME relief, but increases in the rates of relief were a surprise. There were also changes to the rates of corporation tax in the form of a decrease in the top rate and a gradual increase in the small companies’ rate but overall the net value of the R&D benefit has increased for all companies. This is very encouraging and reinforces the Government’s commitment to in this area. Manufacturing companies now need to wake up to the opportunities available to them as we know that many have not claimed on activities such as new product development, process improvements, design and packaging that could be eligible.
Despite criticism of the regime that a proportion of the relief goes to reward companies that would have undertaken their R&D in the UK anyway, it is important to recognise the increasingly competitive global market for R&D activities and to provide companies with an incentive to retain those activities here. Other Governments are enhancing their regimes to try and draw a larger share of this market and the continuing enhancement of the UK relief, together with steps such as the creation of the seven specialist HMRC units helps to reinforce confidence in the UK as a competitive location for R&D activities.
The implications of the changes announced in the Budget are set out as follows:
- Extension of SME definition for R&D relief
- Increase in rates of R&D relief
- Impact of changes to capital allowances
The timing of the changes is interesting in that companies now have a limited window of time in which to prepare and submit their historic R&D claims before the shortening of the deadline takes effect on 31 March 2008. After that date, there is a shorter time period for submitting the claims but a greater value to be realised.
The one area that has not yet been addressed is the current exclusion of capital expenditure from the main incentive, an advantage that several other R&D regimes have over the UK. Although the UK has a regime that provides accelerated deductions for R&D related capital expenditure, this is generally a timing rather than an absolute benefit. As the aim of the regime is to encourage companies to undertake R&D activities in the UK it seems counter intuitive to exclude costs that fall within the qualifying categories but are, or are suggested by HMRC to be, capital in nature. The claimant company is still employing the sort of clever people undertaking precisely the type of activity that the regime is aimed at encouraging.
If you have any further questions or would like to discuss the changes in more detail please contact us.