R & D Tax Credits – An Introduction

21st December 2011

Research and development tax credits for small and medium sized companies were introduced ten years ago to stimulate innovative activity in the UK economy. Many companies have now benefited from substantial tax refunds as a result of the scheme. Unlike most grants for research and development need is not an issue. All that is required is evidence that research and development has been carried out and that the cost can be reasonably quantified.

The basic scheme works by enhancing the tax relief available for research and development by an extra seventy five percent. This gives an extra tax deduction to technology companies which in many cases is often unclaimed. Furthermore where a company is not a tax payer it is able to surrender the loss for a tax refund of twenty four and a half percent of the expenditure in many cases.

The revenue guidance on the definition for research and development is rather long and descriptive. In essence it comes down to technical or scientific uncertainty that needs to be overcome. This applies to all areas of technology including software.

The process stems from the companies annual accounts and routine corporation tax affairs. The accounts need to be reviewed in order to isolate that expenditure which qualifies for the extra deduction. Most of the costs which are involved in a project would generally qualify. This includes materials, salary costs, subcontracted research and development, externally provided workers, heat and light and software costs. These costs would then be summarised and forwarded to HM Revenue & Customs together with a reasonable amount of evidence concerning the work undertaken. In most cases the revenue would aim to respond in thirty days. Often this would involve payment of the refund. In some cases there might be routine enquiries. These are normally cleared up quickly with refunds following shortly thereafter.

Over the years the schemes rules have been improved so that more companies can benefit. Recently, despite the rumour that the scheme would be a victim of the government cutbacks it’s continuance has been confirmed. Additionally proposals are in place not only to widen it’s scope but for the refunds to be further increased. In the near future it is felt that any small or medium sized company carrying out research and development no matter how small would benefit from making a claim. Some of the changes have not had the publicity that they deserve. Companies need to start thinking of this issue now so that their claims can be maximised in future.

The new patent box regime starting in 2013 will be a further boost to technology companies in the UK. Companies carrying out research and development are in a position to benefit from valuable tax breaks not available to others. It is important that these companies take advantage of the help that is available to them by using a professional accountant used to dealing with clients in the technology sector.