Research and Development Tax Credits

Summary

Research and Development tax credits were introduced for 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 a SME be loss-making it can surrender its enhanced deduction for a repayment of a tax credit, equal up to 24.5% of the actual expenditure, capped at the PAYE/NIC contributions made by the company in the accounting period.

Large company definition

Broadly a company is large if it is not a SME.  A SME is defined by the European Commission as a company, together with all other companies in the worldwide group, that has less than 500 employees (less than 250 for expenditure incurred before 1 August 2008) and satisfies one of the two following criteria:

Turnover                        Not exceeding €100m    (€50m before 1 August 2008)                     

Balance sheet total         Not exceeding €86m      (€43m before 1 August 2008)

A company continues to be a SME until it has failed these criteria for two consecutive accounting periods, and similarly, once large, does not cease to be large until it has ceased to fulfil 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 consider to be qualifying activities - these can be found via the following link: http://www.berr.gov.uk/files/file13258.pdf

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 a 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.

Our experience

We have undertaken all types of R&D reviews from detailed meetings with clients to produce a full report on the qualifying activities, through to less detailed reports or brief summaries of the technical projects in HMRC terms for inclusion on the annual tax return or after the event when the company is under enquiry.

For further information or specific advice on the above please contact Craig Hughes on 0115 983 5595 or 07717 840596 or email chughes@edftax.co.uk.