There are significant tax breaks for companies carrying out
research and development, says John Cooney of accountancy firm
Smith & Williamson.
Companies involved in software development - and many other areas
of IT advancement - may stand to gain from some valuable tax breaks
for research and development.
It is possible that a good number of IT firms or departments are
not fully aware of these tax breaks, although it may be possible to
revise an existing tax return if you have omitted to claim the
relief when it is due.
The research and development tax credit was introduced in April
2000, and it is generally only now that many relevant companies are
applying the rules to claim it.
A new tax credit for large companies carrying out research and
development was introduced in the last budget, but the advanced
publicity, and the resources available to larger companies means
that most will be well prepared to take advantage of this
opportunity.
But small- and medium-sized companies (SMEs) may not be up to speed
on the tax opportunities already available to them.
These valuable tax breaks are targeted at companies undertaking
research and development with a view to advancing scientific or
technical knowledge, rather than merely using existing technology.
The starting point for any claim is to ensure that the research
your company undertakes represents a genuine advance over existing
technology.
For example, upgrades or modifications to existing products will
not necessarily qualify, but developing new or cutting edge
techniques may enable you to benefit.
If your company is developing new techniques it may benefit from
research and development tax breaks, but to qualify it must meet
the following criteria:
- Companies must have less than 250 employees
- The annual turnover should be below e40m (about £25m or your
balance sheet total less than e27m (about £17m)
- The company should spend at least £25,000 per year on research
and development and own the associated intellectual property
rights
- Qualifying costs must be revenue rather than capital in nature.
Permitted expenses include staff costs, sub-contractors, and
consumables incurred on or after 1 April 2000, and which relate
directly to research and development work. For example, only costs
of staff actively engaged in research and development work for the
majority of their time, rather than ancillary or administrative
staff, can be claimed. Consumables include, for example, floppy
discs, certain development licences and similar expenses.
There is also a requirement that no more than 25% of the capital or
voting rights of the company can be held by an enterprise that is
not an SME. However, there is an important exception to this rule -
where the shares are held by venture capital companies.
There are two ways to claim the tax credit.
A company can opt for 150% of qualifying research and development
costs to be deducted against income (rather than the 100% usually
allowed), which means the firm's tax bill is cut by reducing its
taxable profits (or increasing its trading losses).
For example, if research and development expenses are £200,000, the
taxable trading profit or loss will be reduced by an additional
£100,000, thereby giving a tax saving at the company's marginal
rate.
Alternatively, if the company is loss-making, the loss can be
surrendered for an immediate tax payment equal to 24% of the
qualifying expenditure (eg 24% x £200,000 = £48,000 tax repayment),
subject to sufficient PAYE and national insurance contributions
being paid in the period.
This represents a lower rate of credit than the first option, but
it can result in an instant cash-flow advantage which can be very
useful to companies developing new techniques.
Because of the generosity of these new tax breaks, the taxman is
likely to look carefully at the tax returns submitted by companies
claiming these allowances. It is therefore important to document
research and development work, noting the costs incurred and all
staff involved, be they contract workers or employees.
Additionally, companies must be sure to have evidence of their
intellectual property rights, and be able to clearly distinguish
their research and development expenditure from product
development.
Smith & Williamson is an independent professional and
financial services group.
www.smith.williamson.co.uk
Backdate your claim for tax breaks
- Small- and medium-sized firms can backdate claims for research
and development cash to April 2000
- Reliefs apply to groundbreaking research, not product
development or upgrades
- Companies must have less than 250 employees
- Companies must turn over no more than about £25m
- Revenue costs qualify, not capital costs
- No more than 25% of shares can be held by larger organisations,
except venture capitalists
- Keep accurate records of expenses - the taxman is likely to
inspect them closely.