Tax Relief/Credit for R&D expenditure in the UK

The R&D tax credit is available for any R&D expenditure invested on or after 1 April 2000. For SMEs*, this means that, when working out their profits for tax purposes, they can now increase the amount they deduct for qualifying R&D spending from 100% to 150%.

Those SMEs that do not make a profit can surrender their qualifying R&D losses in return for a cash payment, equivalent to £24 for every £100 spent.

What companies are eligible? Eligible expenditure must be company expenditure —not that of an individual or partnership — and the qualifying spend must not be less than £25,000 a year (pro rata if the accounting period is more or less than 12 months).

The R&D can be carried out anywhere, and can be sub-contracted. The kind of expenditure that qualifies can include the costs of employing staff actively engaged in research and development activities, as well as the costs of materials for R&D.

The SME must be entitled to ownership rights and any intellectual property arising from the R&D, but cannot claim credit on any R&D funded by another person, or funded — even in part — by Govenment aid.

What is qualifying R&D? Guidelines issued by the Secretary of State for Trade and Industry, developed by the DTI and Inland Revenue, can be downloaded from www.dti.gov.uk/support/taxcredit_b.htm

Eligible R&D activities must be innovative —work that breaks new ground or aims to resolve technological or scientific uncertainties. This work can range from ‘blue skies’ research in purely theoretical areas, .to applied research and experimental development directed towards a practical aim or product.

A Real Working Example Chevin is a West Yorkshire-based IT company, which produces software to improve the performance and cost effectiveness of complex distributed networks. Chevin constantly looks at ways to improve software efficiency and make it less of a load on existing networks.

Finance Director Sharron Amold says she always assumed her company wasn’t eligible for the R&D tax credit. “I thought the credit wasn’t in line with the work Chevin did,” she explains. “One of our venture capitalist funders suggested I investigate it, so I looked it up on the Inland Revenue web site.”

Sharron’s research proved fruitful: Chevin claimed just under £75,000 in R&D expenditure over two years, significant expenditure for a company with 24 staff.

“It’s so worth thinking outside the typical stereotypes one might have when considering whether your company is eligible. Chevin is just a small company; we’re based in a market town, not near any large university.

“It is clearly not the case that the R&D tax credit is only available for academic research, as we’ve proved.

“The tax credit allows better planning for the future. It gives us the confidence to continue devoting a significant amount of staff time to researching and improving our products. We can improve our service to customers and, in turn, sell more.”

Sharron says this credit is available to all industries and she would encourage any company that thinks they might have R&D expenditure to “go for it.”

“The whole process is very easy, we undertook the claim in-house, with help from the Inland Revenue.”

“We’re not a new start-up looking to develop a brand new product. We’ve been around for 10 years and have been lucky enough to find a riche in our market that we can now, with help from the tax credit, continually build on.”

In the Manchester area contact Lee on 0161 288 6001

To find out more, visit http://www.hmrc.gov.uk/randd/

If you are involved in R&D you may also be able to claim R&D capital allowances (see the Capital Allowances manual for further details). Additionally you may wish to visit the Business Link Business Support Directory, or the DTI's R&D web pages, where information is available on the range of Government support, including grants, for innovation and science.

*An SME is classed as a company with less than 250 employees, and either an annual turnover not exceeding 40 million or a balance sheet totaling 27 million, and which is not part of a large group.

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