Research and Development (R&D) Tax Credits – are you eligible?

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Research & Development (R & D) tax credits are the topic of an annual report by HMRC, with the statistics broken down across the small medium sized enterprise scheme and the large company scheme, further analysed between regions and industry sectors.

For this purpose, an SME is a company with fewer than 500 employees and either annual turnover not exceeding 100 million euros or balance sheet total not exceeding 86 million euros (this is a more generous definition, solely for R&D purposes).

By way of reminder, there are two rates of R&D tax credits:

  1. For Small and Medium Enterprises (SME), the SME scheme enables an enhanced deduction of 125% of qualifying expenditure (225% in total), and the ability to surrender losses in exchange for a repayable tax credit.
  2. The large company scheme enables an enhanced deduction of 30% (130% in total), or by election a credit of 10%, which may be payable in certain circumstances where there is no liability to offset. SME’s would need to access the large company scheme where working for large companies as subcontractors.

According to the HMRC report, a review of claims in 2009 found that the R&D tax credit had little impact on company decisions as to whether to carry out the R&D work.  However, the amount of R&D relief claimed is increasing, with the statistics showing an increase in the value of claims in 2011/12 of 20% for SME’s and 3% for large companies.  This may be due to larger companies having already sought advice on R&D, with smaller businesses looking to catch up.

For companies that are carrying out development work anyway, then the R&D review should form part of the end of year financial review – the enhanced deductions can save a considerable amount of tax.   Businesses should think about whether anything they do is innovative, or whether they are finding new approaches to achieve their objectives.  By its very nature, R&D cannot be closely defined and advice should be sought as to whether a company can qualify – the rules are more generous than most people think!

It is widely known that there is substantial qualifying expenditure that is still not being claimed, so to avoid being part of that group, or for more information and to see whether you could claim please contact Leanne Hathaway on leanne.h@ehltax.co.uk

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