In his Summer Budget speech Chancellor George Osborne announced the government is to act to correct an anomaly in the R&D tax credits legislation so that universities and charities are unable to claim the R&D Expenditure Credit (RDEC), in line with the original intention of the policy
To remove the scope for universities and charities to claim the relief, the government will introduce an amendment to S104A CTA 2009 which will describe that an ‘ineligible company’ (which will be defined as an ‘institution of higher education’ or a charity) will be unable to claim RDEC in respect of expenditure incurred on or after 1 August 2015.
This measure relates to a university's or charity's own independent research, and also for the R&D they carry out as sub-contractors. This does not affect ‘spin out’ companies used by universities or charities to commercialise their research. It also does not affect any claims made to date, and universities can continue to claim for any qualifying expenditure they have incurred prior to 1 August 2015.
The government replaced the previous super-deduction for large companies with the RDEC in 2013, saying the aim was to encourage more R&D by large companies, regardless of their corporation tax liabilities. Universities undertaking research are funding separately through science resource funding.
Universities and charities were never intended to claim the RDEC and were unable to claim under the previous large company scheme. However, HMRC reports it has recently received claims for RDEC from universities, which was never the intention or the purpose of the legislation.
HMRC estimates removing the present anomaly will affect less than 50 universities and charities who are currently claiming under the current rules. The legislation will also give Treasury a power to define further categories of ineligible company via secondary legislation.
Dominic Preston, head of innovation tax, Grant Thornton, said: ‘I'm not surprised that the Treasury moved quickly to close this loophole in the RDEC legislation. Having said that the opportunity to claim RDEC for costs incurred to 31 July 2015 remains open for universities and charities alike and may present a useful tax benefit before the change in legislation.
‘On a more positive note the planned reduction in corporation tax in 2017 to 19% and to 18% in 2020 increases the net tax benefit to RDEC claimants further improving the schemes benefits and incentives to innovative large companies.’
In his Budget speech, Osborne also said the government wants to ensure that R&D tax credits remain effective in helping small businesses grow. Following consultation, the government will implement a package of measures to improve the accessibility of R&D tax credits for smaller businesses, including producing new guidance aimed at smaller firms and setting out a roadmap for further improvements over the next two years. It will introduce voluntary advanced assurances lasting 3 years for smaller businesses making a first claim from autumn 2015 and reduce the time taken to process a claim from 2016.