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Research and Development (R & D) tax credit

November 2010

If your business is set up as a limited company, and therefore subject to corporation tax, it is potentially able to claim R & D Relief. Additionally, if your company is categorised as small or medium sized, you can convert an R & D Relief claim into a tax credit, a refund.

For small and medium sized businesses the scheme offers high rates of relief. From 1 August 2008 the tax relief on allowable R & D costs is 175%. Consequently, for every £100 of qualifying costs, your company could claim £175 against its profits.

If an R & D Relief claim is considerable the claim may create tax losses. If these losses cannot be utilised effectively it may be possible to surrender the R & D Relief element of the losses for a tax credit. Presently, for small and medium sized businesses, this is 14% of the R & D Relief. To receive a tax credit you must be able to demonstrate that your company can continue to trade without the benefit of the claim - its accounts must be prepared on a going concern basis.

Larger companies

If your business is classified as a larger concern the relief is limited to 130% of allowable expenditure and there is no provision to sacrifice R & D relief for a tax credit.

What projects are likely to qualify?

To qualify a project will need to incorporate an advance in science or technology - it is not sufficient to claim that a product is commercially innovative. Here is an extract from HMRC's web site that outlines the criteria:

"Rather than stating the name of the product, process, functionality, etc, being developed you should consider what scientific or technological advance is being sought. This focuses attention on the project's aim for an advance, which is the key issue in judging whether R&D for tax purposes is being undertaken.

Science does not include work in the arts, humanities and social sciences (including economics).

It's not enough that a product is commercially innovative. You can't claim in respect of projects to develop innovative business products or services that don't incorporate any advance in science or technology."

Making a claim

If your business has been, or intends to be, involved in R & D how do you make a claim? The short answer is make an application but of course the devil is in the detail. If you believe you may benefit from this relief please call to organise an initial fact find.

Hilton Sharp & Clarke