By Rebecca Combes, Associate Tax Director at Smith & Williamson

As part of its proposals for corporate tax reform, the government intends to introduce a preferential tax regime for profits arising from patents, known as the Patent Box, and also to review the support provided for innovation by the current R&D (Research & Development) tax credits regime.

This will include the proposals made by James Dyson in March 2010 in his report, Ingenious Britain: Making the UK the leading high-tech exporter in Europe. The consultation process on the current R&D tax regime closed on 22 February 2011 and we now await a summary of the findings.

What is R&D tax relief?

Many firms, particularly small businesses, overlook the R&D tax relief system and are not making claims where they could. If you have yet to take the plunge and investigate whether your business could be benefiting, here is a brief summary.

• It is only available to businesses subject to UK corporation tax that undertake qualifying R&D activities and spend at least £10,000 per annum on qualifying R&D costs.

R&D activities are qualifying if they seek to achieve an advance in science or technology through the resolution of a scientific or technological uncertainty.

R&D costs are qualifying if they constitute staff costs, externally provided work costs (i.e. agency staff), sub-contracted costs, consumable costs, software costs and certain other costs.

• The relief takes the form of an enhanced deduction against taxable income to reduce tax payable, or in certain cases, can generate a repayment from HMRC franked by the amount of PAYE already paid — effectively a refund of PAYE.

• There are different rules for SMEs and non-SMEs and a number of other conditions to be satisfied before a claim can be made.

The relief is not sector specific and could, in theory, apply to any industry sector where there is a need or desire to make improvements. For many businesses, the fact that R&D is being undertaken will be obvious, and it’s then a case of applying the specific definition for tax purposes to those activities and assessing if they will qualify for the relief or not. For others, the R&D may simply be an integral part of the product or service that is being offered and so a more open-minded approach is needed to identify this.

What changes can we expect?

It seems unlikely that we will see any significant changes to the current regime which, although clearly underutilised, is thought to achieve the desired result. Public finances do not allow for an increase in the rate of relief at this stage, nor do they allow for a widening of qualifying costs without a corresponding reduction elsewhere. The focus is therefore more likely to be on improving the ease with which taxpayers can claim their R&D tax relief.

The government is keen not to be seen to pick ‘winners’ and ‘losers’ as far as encouraging innovation in the UK and, therefore, any changes that are made to the current R&D tax relief regime will need careful consideration and application. Gentle tweaking around the edges seems more likely, and is probably all that is really needed to a system that otherwise works well. However, one group that does miss out at the moment is new start-ups, which often structure themselves in a way that restricts their ability to claim R&D tax relief. An easy, relatively low-cost win for the government would be to find a way of improving this.

In summary

The good news seems to be that we have a very beneficial tax relief regime in place for those carrying out R&D, and that is unlikely to be changed significantly. What we can expect is improved publicity and communication about the R&D tax relief regime and some small improvements to assist taxpayers in making their claims.

To investigate your potential to claim R&D tax relief, call Rebecca Combes on 01722 434 889 or email rebecca.combes@smith.williamson.co.uk

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