The Budget statement included a very significant increase in the credit which will be available to SMEs for qualifying R&D expenditure. The Chancellor expressed a strong desire to restore the UK’s manufacturing base by encouraging innovation.

Legislation will be introduced in the Finance Bill 2011 to increase the additional deduction for SMEs from 75 per cent to 100 per cent of the qualifying R&D expenditure thus resulting in an effective 200 per cent deduction for such expenditure (currently 175 per cent).

This will be increased further by the legislation to be introduced in the Finance Bill 2012 which will extend the total effective deduction to 225 per cent. This is a very significant increase and should provide SMEs with a strong incentive to fund R&D in the future.


In addition, legislation will be introduced in Finance Bill 2012 as follows:

  • The rule limiting a company’s payable R&D tax credits to the amount of PAYE and National Insurance Contributions (NICs) it pays will be abolished;
  • The £10,000 minimum expenditure condition will be abolished for all companies;
  • Changes will be made to the rules governing the provision of relief for work done by subcontractors under the large company scheme.