Early Christmas presents from HMRC?

The future looks bright for SMEs, who may be eligible to claim valuable R&D tax relief as the rates of relief are planned to increase, and some of the restrictions are proposed to be abolished.

An increase in the rate of enhancement, which is set to rise from 200 per cent to 225 per cent for SMEs, will be welcomed by those businesses who are seeking to help the British economy grow through innovation.

In addition, the proposals suggest removal of the existing £10,000 annual minimum expenditure requirement.

Perhaps more critical in these difficult times is the proposal to remove the cap that limits the surrenderable credit to the company’s PAYE/NIC liability, so limiting any tax refunds that the company may receive. For many SMEs, and particularly startups, which do not always have much by way of funds to pay their owners, this could be a real life line.

The draft legislation for the Patent Box regime indicates that the rate of tax applying to patent income will be ten per cent but there is a fairly complex formulaic approach required to establish what profits qualify for this lower rate of tax.

SMEs will welcome the potential reduction in bureaucracy, as it includes a safe harbour limit of £1m – an increase from the £500,000 proposed in the consultation document. This means that where qualifying profits are less than £1m (or a reduced amount if there are associated companies), a company will be able to allocate 75 per cent of its qualifying profits to the patent box and thus avoid having to undertake the complex calculations – a saving of both time and professional costs.

The bad news is that the draft legislation still only applies to registered patents – which is potentially discriminatory against SMEs whose innovation often remains unpatented, usually for cost reasons. This is particularly disappointing as the SME sector is the source of much innovation and new technology but hopefully this point may still be addressed as a result of the next round of consultation.

Melanie Orriss is a tax partner at Baker Tilly.

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