Research & Development Tax Credits may be for you after all

R&D Tax Credits are not the sole domain of blue-chip companies, and your firm does not need a laboratory and white coats to qualify. There is a minimum spend of £10,000 in an accounting period to qualify. Over recent years we have successfully made a number of claims for our small business clients whilst handling their corporate tax affairs.  Qualification gives you an enhanced write off against your profit and loss account of up to 150% of actual costs (175% from 1 April 2008) for SME’s. If you are loss making, you can surrender some of your loss for a tax refund worth up to 24% of actual expenditure. What constitutes R&D can be a little “grey” rather than black and white.

Below is a brief guide to the scheme, and links for further information.

Why you shouldn’t discount yourself
R&D is defined by the DTI (its definition modifying accounting standard SSAP13 for tax purposes).  Simplistically, R&D has to give a technological advance in overall knowledge or capability in a field of science or technology (not a company's own state of knowledge or capability alone) where there was scientific or technological uncertainty about its success. It can be a new or appreciable improvement in an existing process, material, device, product or service, typically including costs up to development and testing of a prototype.  R&D occurs even if two competing companies are working on the same idea in isolation i.e. trade secrets.  Failed projects will still qualify. But the marketing, and work on packaging of the item for example will not qualify for R&D as this does not involve resolving scientific issues.

Here are two illustrations from the DTI guidelines:

  • “A firm's project involves finding a new active ingredient for weed-killer (an advance in overall knowledge or capability in the particular field of science or technology….), and developing a formula incorporating the new active ingredient for use in a commercial product…. Both of these would constitute an advance in science or technology.
  • A company is seeking to make a water-breathable fabric for use in hiking gear. A test fabric with the required physical characteristics is produced through R&D. This new fabric is then produced in small quantities (not R&D) and market tested with a number of trial users. The user tests are not R&D, because they are concerned with testing the commercial potential of the new material and assessing its appeal to users”

Qualifying costs are:

  • employing staff directly and actively engaged in carrying out R&D, or paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D
  • consumable or transformable materials used directly in carrying out R&D (broadly, physical materials which are consumed in the R&D)
  • power, water, fuel and computer software used directly in carrying out R&D

“Notified State Aid” needs to be taken into account, but grants such as micro-enterprise awards are not always classed as notified state aid. The grant provider should be able to tell you the status.
A claim needs careful preparation and is subject to scrutiny and agreement by specialist HM Revenue & Customs teams, though the process is not as stringent as that in the US or Canada. Over 6,000 claims were received by HM Revenue & Customs in the year to April 2005.  You can go back six years to make a claim.

In our most recent claim for a client who is developing a programmable Smart Card, the research was part-funded by grant income and relief had to be claimed under both the small and large company schemes – enabling our client to receive a much-needed refund from HM Revenue & Customs on one segment, and also enabling additional losses to be claimed to carry forward against future profits.

In addition to the enhanced reliefs above, 100% capital allowances are available on qualifying R&D capital costs, regardless of whether the expenditure is taken as a deduction in your profit and loss account or capitalised.

Please contact Nevil Pearce, partner, or Rob Durrant-Walker, tax manager, if you would like further information.

This information is intended for general guidance only and is based on the legislation at 31 July 2007. No responsibility is accepted for loss occasioned to any person acting or refraining from actions as a result of any material in this publication. © UHY Calvert Smith 2007

Useful links:

This chart indicates whether a company undertaking one R&D project is likely to be eligible for R&D tax reliefs or R&D tax credits