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IT departments could cut their software development costs by up to 10% if they qualify for tax relief on research and development projects.

The Department of Trade & Industry highlighted the tax incentives on offer last week when it published a report about the amount of money firms in and outside the UK spend on research and development projects.

R&D spending as a percentage of sales for UK software and IT service companies rose from 5.8% in 7% in the past year, according to the report.

Mike Tubbs, a senior industrialist with the DTI Business, Finance and Investment Unit, said that if a business' software development efforts fulfiled the government definition for R&D, large companies could benefit from tax breaks of 125% and smaller firms could get up to 150%.

These tax credits translate into cost savings on R&D projects of about 7.5% and 10% for companies that take advantage of them.

To qualify for the tax credit an IT project must prove that it is novel, contains an element of risk and will produce significant benefits.

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