October 29th, 2012 / Insight posted in

Tax relief can help with R&D

JL writes: I am writing the business plan for a software company I have started. I need to know how to apply for tax credits for research and development. How long will it take for the company to receive the credit? I am trying to calculate when I will need to raise more capital.

Any company that spends money on research and development (R&D) can apply for tax relief through its annual tax return, writes Chris Lane, partner at Kingston Smith LLP.

From August 2008, HM Revenue & Customs allowed R&D costs to be increased by another 75%, giving £175 tax relief for every £100 spent. Spending before August 2008 was allowed only a 50% uplift. If you are making profits, this rise reduces the taxable profit and so the tax you have to pay.

On the other hand, if you have made losses, the losses applicable to R&D costs can be used to claim a tax refund. The tax credit is 14% of the original R&D costs (which receive a 75% uplift). Therefore, £24.50 can be recovered for every £100 spent and could be a welcome cash inflow when you are just starting out.

There are various conditions. A minimun of £10,000 has to be spent on R&D in the year. To be able to claim a refund you have to be a small and medium-sized enterprise (SME). The definition of SME is a business with fewer than 250 employees, a turnover of less than €50m (£43.4m) and a balance sheet total of less than €43m. Only two out of the three criteria need to be met.

R&D undertaken outside Britain is eligible for tax credits, with the amount that may be claimed limited to the company’s Pay As You Earn and National Insurance liabilities for the period in question.

There are guidelines on HMRC’s website defining the type of R&D that qualifies for tax relief. Generally speaking, the research must be creative or innovative work undertaken to increase overall knowledge in a field of science or technology. Commercial development without scientific or technological innovation will not qualify for relief.