Research and development tax credits allow companies to claim enhanced tax relief in the U.K. for qualifying R&D spending. Their aim is to encourage U.K. R&D and to promote investment in innovation. In the Budget 2004, changes were introduced aimed at simplifying the definition of R&D and widening the range of expenditure that will qualify for R&D tax credits. These represent a further government investment in R&D worth £35 million per year.
In summary, the current law provides that a company that is a small or medium-sized enterprise (SME) carrying out R&D can claim 150% tax relief if it incurs qualifying R&D expenditure. The credit is available if the SME either incurs the expenditure on its own behalf, or if it subcontracts R&D work to someone else; for example, another SME, a large company or a non-taxpayer such as a university or charity. It can therefore deduct 150% of the qualifying current spending on R&D when it calculates its taxable profits, instead of the normal 100%. A large company can claim 125% tax relief but cannot claim R&D tax credits if it sub-contracts R&D to another person. To qualify, the relevant spending on R&D (whether by an SME or a large company) must not be less than £25,000 per year. There is no restriction on where the R&D can be carried out.
The Budget 2004 gave effect to new guidelines published by the U.K. Department of Trade and Industry (available at www.dti.gov.uk/support/rd_guidelines.htm) which make the R&D definition easier to understand and use, designed to give U.K. companies greater confidence to invest in creating high value-added products and services. The extension to the types of expenditure qualifying for R&D tax credits also widens the support given to innovative companies. Broadly, expenditure qualifying for R&D tax credits and vaccines research relief currently includes expenditure on staff costs, consumable stores, externally provided workers and (in certain cases) expenditure on sub-contracted R&D. The Budget 2004 has expanded these categories to include expenditure on software, power, fuel and water. The definition of consumable stores is also being amended so that expenditure on consumable or transformable materials will qualify for relief. All the changes introduced will affect large companies from 1 April 2004 and SMEs and vaccines research relief as soon as State aids approval has been received from the European Commission.
Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.
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