An Introduction to the Research & Development Tax Scheme
R&D tax credits are a Government backed initiative funded by the EU to encourage both SME’s and Large Companies to invest in innovation through greater R&D funding. The idea is to reward companies striving towards advancement within their field with either a cash-back incentive or reduced future tax bill so that British companies have funding to support them in keeping overseas competition at bay.
In terms of qualifying for the scheme, there are conditions to be satisfied, the claimant will need to identify any projects the Company has undertaken initially for two retrospective accounting years (subsequent claims are for the previous accounting year) that have required a degree of problem solving, innovation and technological advancement; this means the Company undertook a job whereby an immediate solution wasn’t readily available, took a risk and conducted some trial and error and achieved or aimed to achieve (abortive projects count also) something that led to a breakthrough within their field, these qualify as R&D.
RandD (UK) Limited has a broad range of clientele ranging from Electronics and Engineering to Software, Pharmaceuticals and Medical Equipment manufacturers; provided a Company can demonstrate that are trying to achieve something unique with an immediate advantage to the Industry then they are likely to receive a tax benefit through the scheme.
As with all development work, there will be a proportion of costs that can be recovered, tax relief is based on the everyday costs the business incurs – so we take a proportion of staff costs (gross salaries, employers NI, pension) add this to material costs (any items consumed or transformed during the R&D process that haven’t been subsequently sold or reused) sub-contracted labour for involvement with R&D we can claim at a reduced 65% and also a proportion of utilities (gas, electric & water) can be claimed back.
All companies spending at least £10,000 a year on qualifying research and development (R&D) are entitled to a deduction when calculating their taxable profits of 175% of qualifying expenditure for SMEs increasing to 200% in respect of expenditure incurred on or after 1st April 2011. For Large companies the deduction to April 2008 is 125% rising to 130% thereafter.
In more recent news, George Osborne, the Chancellor of the Exchequer, announced on April 1st that the deduction for SMEs will be increased from 200% to 225%. What’s more, the corporation tax is going to be cut by two per cent this year, followed by a further three per cent decrease by 2014.
The latest R&D tax credit data published October 2011 shows that over 9,400 claims were made during the year to 31 March 2010, for support totalling £1.02 billion based on £10.14 billion of R&D expenditure.
From the events of the past two years, it is clear that the government is doing a lot to promote business investment in the United Kingdom. Not only are the current R&D tax credits favourable for businesses of all sizes, but there are already plans set in place to increase tax credits and relief in the foreseeable future.