Introduction »

Research - the sky’s the limit

Research and Development (R&D) by UK companies is being actively encouraged by Government through a range of current and proposed tax incentives. One area where tax incentives already operate but where improvements are being made is the area of R&D expenditure for small and medium sized enterprises (SMEs).

R&D tax credits provide extra tax relief for R&D qualifying expenditure incurred by SMEs. There are two main elements to the relief, an increased deduction for R&D revenue spending and a payable R&D tax credit for companies not in profit.

The R&D tax relief increases the amount a company can deduct on qualifying current spending on R&D from 100% to 200% for expenditure incurred on or after 1 April 2011 and the Government intends to increase it further from April 2012.

Not everyone can claim R&D tax credits and not all expenditure qualifies. The most important conditions are:

• only companies can claim R&D tax credits. R&D tax relief and the payable R&D tax credit is not available to individuals or partnerships
  
• the company must be a small or medium-sized enterprise (SME)
• the R&D does not have to be undertaken in the UK
• the spending qualifying for relief must not be less than £10,000 a year (restriction to be abolished from 2012)
• the spending must not be incurred in carrying out activities contracted to the company by another person (however a slightly different form of R&D tax credit may apply)
• the expenditure must not have been met by another person (if the R&D project is funded in whole or in part by State aid such as a government grant, none of the spending on that project can qualify for R&D tax credits)
• the payable R&D tax credit is currently limited to the amount of the company’s total PAYE and NIC liabilities of the accounting period (but this restriction may be abolished from 2012).

The first essential thing to determine is whether HMRC would accept that the particular activities constitute R&D. The second is then making sure the relevant tax rules are met.

If this is something that you would like to discuss in more detail, please do get in touch.

Introduction »