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R&D Answers: What Are Research And Development Tax Credits?

Date: 28th October 2011

It’s Wise To Understand What Research and Development Tax Credits Are So You Don’t Miss Out!

The Research and Development Tax Credits scheme was designed by the now renamed government Department of Technology and Industry (DTI) to provide a Corporation Tax incentive to companies using science or technology to create innovative products, services or processes.

The current rate as it applies to Small and Medium Enterprises (SMEs) enables companies to treat qualifying R&D expenditure at 200% of its value for the purpose of calculating their Corporation Tax. This rate is effective from 1st April 2011. For large companies the current rate is 130% so the big purpose is to encourage SMEs to innovate.

In our posts we will talk about R&D Tax only as it applies to SMEs. If your company is not paying tax you can surrender future losses and receive the Research and Development Tax Credits in the form of a cash payment – or you can carry forward the loss to be offset against future profits. The financial benefit to your company is likely to be 20% of the qualifying spend, that is if the qualifying spend has the effect of reducing the profit figure on which your tax is calculated. If there are no profits i.e. you made a loss, the tax credit is calculated at 14% of qualifying spend.

Your minimum annual qualifying R&D spend must be in excess of £10,000 and claims must be made within two years of the financial year end to which they relate. Where the credit is received as a cash payment your claim is limited to the amount of total PAYE/NI due by your company for the qualifying period – this rule may change soon (see below). Surprisingly, where R&D has been capitalised more than two years ago, then written off to the P&L account some time later, the costs can qualify in the year they are written off.

Good news on Research and Development Tax Credits - we have been led to believe that the rule about the Research and Development Tax Credits not exceeding the total PAYE/NI due for the qualifying period will be removed from April 2012 and that the rate of treatment of qualifying expenditure will increase to 225% from that same date.

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