Supporting innovation - R&D tax credits

To encourage innovation among smaller firms, the government introduced tax credits for those that invest in research and development.

Many businesses tend to see R&D as the preserve of larger companies. However, SMEs that put funds into developing their products and services could qualify for important tax relief.

For the purposes of the tax credits, an SME is defined as a business that employs no more than 250 staff; that has an annual turnover not greater than 40 million euros; that has an annual balance sheet not greater than 27 million euros; and that is independent.

Tax credits can be claimed on the cost of employing staff who are directly or actively engaged in carrying out the R & D and on the cost of the materials that are used in the R & D. Capital expenditure, however, is covered by R&D allowances. To qualify for tax credits, a business must spend at least £10,000 a year on R&D.

A business can claim relief in two ways. It can set 150 per cent of its qualifying expenditure against taxable profits; that is, it can reduce the amount of the profits on which it has to pay tax by 150 per cent of the qualifying R&D investment. If, however, a business makes a loss, it can still take advantage of the credits by claiming a 24 pence in the pound cash refund on the qualifying expenditure.

Claims for the tax credits are made on the firm's corporation tax return, where there is an appropriate section that can be filled in.

What actually constitutes R&D is wide-ranging, but includes the development or improvement of a product or process.

Any business that wishes to claim R&D tax credits should consult with its accountants or professional advisers, or it should contact its local Inland Revenue inspectors.