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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