R&D Tax Credits - Don't miss this valuable benefit

The financial benefits of the R&D tax scheme can be substantial, particularly for companies involved in technology who are likely to undertake eligible work.  While many companies are using this scheme successfully, many others either do not realise that they have eligible projects or consider that it is not worth the effort because of a misconception of the process involved.

R&D Tax Credits were introduced for Small and Medium Enterprises (SMEs) in April 2000 and for large companies from April 2002.   Any type of company can claim the relief if incurring qualifying expenditure of at least £10,000 per annum on qualifying activities.

The credit represents an additional 75% tax deduction for qualifying expenditure by SMEs (30% for expenditure by large companies). In addition, should an SME be loss-making it can surrender its enhanced deduction for a repayment of a tax credit, up to the equivalent of 24.5% of the actual expenditure, capped at the PAYE/NIC contributions made by the company in the accounting period.

A company continues to be an SME until it has failed the criteria for two consecutive accounting periods and, similarly, once large, does not cease to be large until it has ceased to fulfill the criteria over two accounting periods.  Special rules apply when a company joins or leaves a group.

Definition of qualifying activities:

Broadly an activity must be seeking to achieve a significant advance in science or technology through the resolution of a scientific or technological uncertainty. The DTI Guidelines give more detail in terms of what HMRC considers being qualifying activities – these can be found via the following link:  http://www.berr.gov.uk/files/file13258.pdf

The definition is deliberately technology-neutral, so that claims are possible from any field of science or technology, other than work in the arts, humanities, social sciences and economics, including engineering and software, not just the more obvious areas such as life sciences.

Definition of qualifying expenditure:

The bulk of most claims will relate to staff or consumables costs, although there are special rules for subcontractor costs and agency worker costs.

Time limit for making a claim:

A claim by an SME or large company for the additional relief at 75% or 30% must be made within two years of the end of the accounting period in which the expenditure is incurred.  For SMEs, if a claim is also made to surrender the enhanced loss for a tax credit repayment, the claim must be made within two years of the end of the accounting period in which the expenditure is incurred.