R&D tax credits – the facts

R&D tax credits were increased for SMEs in the Budget 2011, announced by Chancellor George Osborne on March 23.

The new R&D tax credit rules come into force this week. What do you need to know about the R&D tax credits?

Chancellor George Osborne announced an increase in the rate of R&D tax credit under the SME scheme to 200 per cent from April 2011. This will then increase to 225 per cent from April 2012.

R&D tax credits aim to help companies to invest more in R&D. The tax credit can either reduce a company’s tax bill or, for some SMEs not in profit, provide a cash sum. 

What is R&D?

A basic definition of R&D, as defined by BIS, is “work to resolve scientific or technological uncertainty aimed at achieving an advance in science or technology”. Advances could mean new or improved products, processes or services.

R&D projects must also fulfil other conditions:

• it must be related to your company or organisation’s trade – either an existing one, or one that you intend to start up based on the results of the R&D
• if your company or organisation is claiming relief under the SME Scheme, it must own any intellectual property that might arise from the project

The SME R&D scheme

The SME R&D scheme allows for higher rates of relief than for larger businesses. From April 2011, the tax relief on allowable R&D costs is 200 per cent – that ism for each £100 of qualifying costs, your company could have the income on which Corporation Tax is paid reduced by an additional £100 on top of the £100 spent.

Of course, you can only claim under the scheme for SMEs if your company meets the definition of an SME for R&D relief purposes. Generally, this means a company with fewer than 500 employees and either an annual turnover of less than €100m or a balance sheet that doesn’t exceed €86m. 

It’s also important that your firm is a going concern – ie that your latest published accounts were prepared on a going concern basis and nothing in the accounts suggests that you’re dependent on receiving R&D relief or tax credits.

What R&D costs qualify?

Only specific things fall under the R&D tax credit relief. These include: employee costs, staff providers, materials, utilities, software, subcontracted R&D expenditure. 

Of course, if you’ve spent money on something such as staff costs where the employee was only partly engaged on R&D activities, you can only claim for an appropriate proportion of the cost.

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