October 26th, 2012 / Insight posted in

Will our research qualify for tax relief?

MD writes: I am the director of a computer software company and am interested in the tax credits that were introduced in the recent budget for research and development spending by small to medium-sized companies. Will my company, which is developing new products, qualify?

To encourage investment in research and development, this new system gives £150 tax relief for every £100 spent – in other words, the taxable profits of the company are reduced by an additional 50% of the spending. If a company does not have taxable profits and therefore does not pay tax, the spending can be used to make a claim for a tax credit of £24 for every £100 spent. The company can either claim £24 now if it is making a loss, or carry it forward and possibly obtain relief. At the small-company rate of 20%, this would be worth £30. There are various conditions. Minimum spending in the year eligible for relief is set at £25,000 and the maximum turnover limit for a company to qualify is set at 40m euros (£25m). Research and development undertaken outside Britain is eligible and, rather bizarrely, the amount that may be claimed as a repayment is limited to the company´s Pay As You Earn and national insurance liability for the period in question. For a start-up company this may greatly devalue the benefit. However, perhaps the most significant point about this new tax relief is the lengthy guidance notes on what sort of work it can be claimed. It must be creative or innovative work in science or technology, undertaken with a view to extending knowledge. Commercial development without scientific or technological innovation will not qualify. In particular, the following software activities are ruled out: supporting existing systems, converting or translating computer languages, adding user functionality to application programs, debugging systems, adapting existing software and preparing user documents. The type of spending likely to qualify would relate to new operating systems, new programming languages, new or enhanced query languages, software engineering methodologies for improved computer programs and artificial intelligence