The government is planning to deliver a 75 per cent increase in research and development as a percentage of GDP by 2014, to remain competitive in the global market.

One method of doing this is through research and development (R&D) tax relief and credits in the corporate tax system. R&D tax relief is available for SMEs from 1 April 2000 and for large companies from 1 April 2002.

Only revenue expenditure for tax purposes is claimable under the R&D tax relief programme. Capital expenditure is excluded.

Revenue expenditure which is taken to the balance sheet as an intangible asset is also allowable in full even if less than 100 per cent of the expenditure is amortised.

The relief for SMEs is available under the SME Scheme in two forms.

(a)      An enhanced deduction of 50 per cent of R&D expenditure is available in the tax computation. This works out as an after-tax benefit of 10 to 15 per cent on R&D spend, depending on your corporate tax rate. If your company spent £100,000 on R&D you can expect approximately a £10,000 to £15,000 after tax saving on this work.

The 2007 Budget increased the enhanced deduction to 75 per cent of R&D expenditure from April 2008 which in turn provides for greater tax relief.

(b)      If your company is loss-making, you are eligible to surrender your losses for a cash refund from the government of up to 24 per cent of R&D spend. Even if your company does not pay any corporation tax, therefore, the government will send you a cash cheque for your development work.

If you are loss-making and spend £100,000 on R&D you can expect up to £24,000 in cash back from the government.

A large company can enhance its R&D expenditure by 25 per cent in its tax computation under the terms of the Large Company Scheme. This works out as a 7.5 per cent after-tax benefit of R&D spend, assuming a 30 per cent tax rate.

For large companies there is no refundable cash cheque for loss-making firms. If a large company incurs £100,000 of R&D expenditure, therefore, it can expect an after-tax saving of £7,500 on this expenditure.

The 2007 Budget increased the enhanced deduction from 25 per cent to 30 per cent of R&D expenditure from April 2008 which in turn provides for greater tax relief.

Generally, if you employ fewer than 250 staff and have either a turnover of less than approximately £34 million or total assets of less than around £29 million, you will meet the definition of a SME. This is provided you are not a member of a large group of companies that fails these thresholds.

A company may still, however, be deemed to be a SME if it is held by venture capital companies or business angels, even where it fails these thresholds. In this case it will still attract the more lucrative relief under the SME Scheme.

The 2007 Finance Bill has increased these thresholds to 500 staff, circa £67 million turnover and circa £58 million total assets.

Claimable expenditure can include:

• Staff expenditure (including base salaries, bonuses, employer’s NIC)
• Externally Provided Worker expenditure
• Consumable expenditure (materials, water, fuel, power)
• Subcontractor expenditure
• Software expenditure
• Payments to the subjects of a clinical trial.

Retrospective claims

At present companies can go back up to six years to make retrospective claims. From March 2008 this time frame will be shortened to two years. It is very important for companies who have yet to make claims to take the necessary steps to submit for their earlier accounting periods.

Greg Howe is UK operations director at Braithwaite Tax Recovery Consultants.

Related links

• Braithwaite Tax Recovery Consultants Limited

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