Research, Development and Tax Credits

Research and development is one of the UK Governments key drivers for productivity growth. High levels of R&D, support strong and stable growth. The Government’s target is to raise the level of R&D investment in the UK as a whole to 2.5% of GDP by 2014.

The aim of the Research and Development Tax Credits scheme is to encourage greater investment in innovation in the UK.

The R&D Tax Credit scheme was introduced in 2000 for SME's and 2002 for larger companies. The SME scheme was significantly enhanced 1st August 2008. 1st April 2011, 1st April 2012 and 1st April 2014 and the Large company scheme on the 1st April 2008 and 1st April 2013. The schemes allow for qualifying Research and Development costs to be enhanced for company tax computation purposes. From the 1st August 2012 every £1 spent by an SME can be treated as if the company had spent £2.25 for tax purposes. This is expected to rise to £2.30 from the 1st April 2015.

To qualify; R&D must be part of a project or planned objective, it must seek to increase the overall stock of knowledge or capability in a particular field, it must seek to resolve scientific or system uncertainty. The caveat that must be borne in mind when reading this paragraph is "within your business". R&D includes gaining knowledge that already exists elsewhere, but which is "trade secret" and therefore unavailable to your business, therefore to gain it, you must re-invent it.

Let's take an example of a company spending £100,000 per annum on developing new products (staff costs, materials, consumables). If the company is a Profit Maker it could save £25,000 in Corporation Tax (25% of spend), if a Break-Even business it could receive a £18,125 Payable R&D Tax Credit (just over 18% of spend in Cash) and if the business is losing £100,000 or more it could receive a £32,625 Payable R&D Tax Credit (almost 33% of spend in Cash).

From 1st August 2008 the definition of a Large company was doubled to have 500 or more employees with either turnover at €100million or more or a balance sheet totaling €86million or more.