R&D tax credits explained
On 1 April 2004, the government introduced new guidelines to clear up the confusion over research and development tax breaks. Could your firm benefit?
Guidelines designed to clear up the confusion over research and development (R&D) tax breaks came into force on 1 April 2004. But what exactly are the new regulations and will small businesses be any the wiser as to how much they will have to pay?
The government has claimed the guidelines will help clarify grey areas on what innovative firms have to do to be eligible for R&D tax relief.
According to accountants, the complex rules governing R&D tax breaks have resulted in businesses paying too much tax when undertaking research. Worse, ignorance over the cost of taking time out for R&D has deterred some firms from starting up research at all.
In fact, UK small firms can enjoy enviable R&D tax breaks, if they can find out about them in the first place that is. Each £1 spent on R&D is now deductible at a rate of 150 per cent for small businesses, compared with 125 per cent for their larger counterparts.
Patricia Hewitt, the trade and industry secretary, said: “These new guidelines will make it simpler for businesses to interpret the tax credits and receive as much support as possible to carry out the R&D they do.”
But what exactly are the guidelines and what is defined as R&D?
Small businesses are entitled to a 150 per cent tax relief on R&D, including all expenditure on staff costs, consumables and some sub-contract costs.
R&D itself is defined as:
Creative work - work of a non-routine nature which contains novel elements or outcomes.
Undertaken on a systematic basis - this excludes one-off or ‘lucky’ discoveries. According to the guidelines, producing a novel or unique product or service isn’t in itself sufficient – it’s how such attributes arise that is important.
Work that increases the stock of knowledge - not just the knowledge within the company. To qualify for R&D tax credits, work must result in a scientific or technological advancement.
Within the fields of science or technology - which excludes the humanities and social sciences.
Crucially, the new guidelines state that R&D work must not “merely duplicate” what has been done before and should result in a “significant or perceptible” advance.
In brief, the guidelines define R&D as – “R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.”
When does the tax credit period for R&D start and end?
The new guidelines state that the R&D period begins when work to “resolve the scientific or technological uncertainty” starts, and ends when the uncertainty is resolved or work to resolve it ceases.
Once the R&D periods ends, problems that arise from the products or service may require fresh R&D to take place. But the guidelines are clear that there is a distinction between such problems and routine fault-fixing.
How can you apply to get an R&D tax break? If you feel that the work you are undertaking, or plan to undertake, qualifies for R&D tax credits, it’s imperative that you apply for consideration. As the old saying goes, there is no harm in asking. If you fail to apply for R&D tax breaks, you could miss out on valuable savings, putting your entire project at risk and damaging the viability of your business.
If you feel you may be eligible, call the Department of Trade and Industry on 020 7215 5000 or go to www.dti.gov.uk