R&D tax credits
The government have announced an £80m boost to the Research and Development (R&D) tax credits scheme for small and medium enterprises (SMEs), to be effected by raising the proportion of qualifying expenditure an SME can claim as a tax credit.
R&D tax credits were introduced in 2000 to promote investment in innovation and are mainly aimed at SMEs although a corresponding scheme exists for large enterprises. A qualifying R&D project will generally be one which extends overall knowledge or capability in a field of schience or technology, or creates a process, material, device, product or service which incorporates such an extension, or makes an “appreciable improvement” to or full-scale replacement of an existing process, material, device, product or service. The key part of the criteria is that theoverall knowledge or capability in a field must be extended, not just a company’s own state of knowledge or capability.
Possible expenditure which may qualify for the purposes of an R&D tax credit claim includes employed staff costs (where the staff are directly and actively engaged in the R&D activities), materials and consumables used in the course of the R&D, and utilities and certain ICT costs which are useddirectly in carrying out R&D. Some sub-contracting costs may be included as well, but are subject to particular rules. All this qualifying expenditure must amount to at least £10,000 in the accounting period for a claim to be made, but there is no upper limit.
The tax credit works by allowing businesses to deduct a percentage of this qualifying expenditure from their profits before tax. The rates are currently 150% of qualifying expenditure for SMEs and 130% for large companies (note that the HMRC manual has yet to be updated with the latter figure in places).
SMEs already have the additional benefit of being able to convert their tax credit into a cash payment if they have losses in the accounting period. Under the new rules announced yesterday, they will also see the percentage of qualifying expenditure they can claim as a tax credit go up to 175%. The size of company that can qualify for the tax credits, defined in terms of number of employees, balance sheet value and turnover, will also double.