R&D tax credits: they're worth a bit of research

26 May 2009

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If you could persuade the taxman to reduce your company's profits by £1.75 for every £1 you spend, that would be worth doing - right?

Well that - in a nutshell - is what research and development (R&D) tax credits do - and if you're not making profits yet, he'll even pay you back 14% of the £1.75.

The Government wants the UK to lead the way in new, innovative ideas and it is prepared to pay to encourage investment in 'blue sky thinking'.

But, you say, what's that got to do with me? My business has nothing to do with white coats and test tubes. Well you'd be surprised, it's not all about lab rats and chemicals.

Research and development is concerned with projects that seek to achieve an advance in science or technology through overcoming a problem - what HMRC call "resolving a technical uncertainty" - and this can open up quite a wide field.

Suppose, for example, you are a food manufacturer. You will always be looking for improved processes or new products. Let's say your new flavour of cookie keeps turning out an unpleasant shade of green. If you can solve that technical problem with new research that keeps you the first in the field, that could well qualify.

Manufacturers of machinery including cars may have to overcome "uncertainties" with new prototype parts. That would also qualify.

And don't rule out other areas such as software. New designs for interactive entertainment software, software for mobiles phones and even computer games have qualified as long as it solves a problem and takes technology a step forward.

Lots of small businesses potentially could benefit from this. But there is, of course, plenty of small print. Only companies can claim and you need to spend at least £10,000 per year on research and development. Not all expenditure qualifies. Broadly it boils down to:

staff costs of employees working on research and development
consumables used up in the process (that would be things like test tubes or the odd pencil) and
research and development work that you sub-contract to someone else (but you can only claim 65% of this cost).

You can't claim for overheads or for capital expenditure. But this is still a valuable perk and many businesses are not claiming what they are entitled to.

Maybe you are one of them – why don't you do a bit of research into it?

About the author

David Young is an Associate Director at BKL Tax and can be reached on 0208 922 9104, email david.young@bkltax.co.uk. He is also Chairman of the UK200Group Tax Panel. UK200Group is the UK's leading mutual professional association of over 120 quality assured independent accounting and lawyer firms and 50 International Associate member firms around the globe.

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R&D tax credits: they're worth a bit of research

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