A wider range of costs will qualify for the R&D tax credit. Qualifying costs now include expenditure on software, power, fuel and water. The R&D schemes will also be modified to prevent any change in the timing of the R&D relief from companies' adoption of International Accounting Schemes. New guidelines defining R&D have also been published which are intended to be clearer and easier to use – albeit they do not widen the definition of R&D.
The Government said that the Inland Revenue will continue to focus on implementation of the tax credits by producing improved guidance in support of the R&D tax credits and will embark upon a programme to improve delivery of the credit. It also plans to issue regular information on R&D tax credits in its publication of National Statistics.
However, Intellect, the trade association for the UK's IT, telecoms and electronics industry, expressed its disappointment that the Chancellor failed to increase the effective R&D tax credit rate. It said it is still below what it calls the 'noise level' of real incentive.
The trade association argues that, even with the confirmation of a limited widening of allowable costs, tax credits are still not aggressive enough and will fail to provide British companies and multi nationals with the incentives they need to invest in the UK as an R&D base.
Tom Wills-Sandford, Intellect's Director of Campaigns, said:
"This Budget has left us seriously concerned about the outlook for the UK as a base for research and development and innovation."
"The widening of allowable costs for R&D, and the clearer definition of R&D (both measures Intellect has consistently campaigned for), will hopefully bring greater levels of certainty to R&D decision makers. However, even with a widening of the range of allowable costs, the UK tax credits scheme still fails to pass the 'noise level' test."
"However, we welcome the Chancellor's plan to produce improved guidance in support of the tax credits. There are signs that the Revenue still does not understand the nature of Software Development and the vital role it plays in innovation, and so we will be examining this new guidance to ensure that it will make it easier to claim the credit, particularly for software R&D. We are delighted that there will be improved statistics on the credit, as this will enable the UK to successfully measure its relative attractiveness as a base for R&D against international competitors."
Other changes:
VAT registration threshold
From 1st April, the VAT registration threshold will also be increased in line with inflation from £56,000 to £58,000. This remains the highest threshold in the EU. From the same day, the turnover ceiling for businesses wishing to use the VAT annual accounting and cash accounting schemes will be increased from £600,000 to £660,000, making the scheme available to an additional 13,000 small firms.
More tax payable for owners of small companies
Following the recent controversy surrounding the Revenue's policy on taxation of dividends paid by small family-owned companies, new rules will be introduced as of 6th April 2004 which will affect married couples owning shares in close companies (generally small companies owned and run by five or less people).
Whereas before dividends and other distributions paid on jointly owned shares in close companies would be taxed as if the husband and wife each own 50% of the shares, couples will now be taxed in accordance with the actual proportion in which they hold the shares and are entitled to the distributions. This means that the overall tax liability of the couple may increase as a result, especially where the person holding the majority of the shares is a higher rate tax payer and the other person in the couple is not.
Small company dividends to be taxed
Dividends and other distributions made by small companies to non-company shareholders on or after 1 April 2004 will be subject to corporation tax at 19%. In particular, companies or groups with profits below £50,000 (the threshold for small companies' rate) will be affected. However, profits that are retained or distributed to other companies remain subject to lower rates of corporation tax.
Furthermore, new start-up companies will soon have to notify the Revenue that they have started trading even if their profits are not yet chargeable to corporation tax. It is expected that companies will be granted a window of three months from the date trading has commenced in which to notify the Revenue before penalties will become due.
Capital allowances increase for small businesses
Small businesses will soon be able to claim more first-year capital allowances when they invest in plant and machinery. Capital allowances allow the cost of plant and machinery assets to be written off against the business' taxable profits. Companies claiming first year capital allowances can write off their capital costs earlier than companies claiming capital allowances and may write off a greater proportion of the capital costs.
Small and medium-sized enterprises can claim normally 40% first year capital allowances on their investments in most plant and machinery but for one year small companies only (so not medium sized companies) may claim 50% instead. This measure will apply to investments made on or after 1 April 2004 for companies subject to corporation tax and on or after 6 April 2004 for businesses subject to income tax. It is hoped that this measure will increase the cash-flow for small businesses when investing in plant and machinery