UK tax incentives for R&D work have been boosted at a time many businesses appreciate all the help they can get.

We find despite all the publicity businesses are still missing out, failing to claim in full or risking unwanted levels of HMRC queries in proving their claim.

Our team have helped businesses in all these aspects to get what they are due, including dealing with the HMRC specialist R&D units.

Why bother?

Large businesses from 1 April 2008 can get a tax deduction on 130% of qualifying spend, rather than 125% as before. So each £100,000 spend can mean up to £8,400 tax can be saved.

SMEs from 1 August 2008 saw their deduction rate go up to 175% from 150% of qualifying spend and the thresholds for being a SME doubled. That means a tax deduction can almost treble, generally speaking, for companies with between 250 and 500 employees and turnover between €50-100m or gross assets between €43 and 86m.

SMEs can also surrender their relief against losses to get cash back at a rate of 24.5% – again, the doubling size limits mean more companies can claim. Each £100,000 spent on research, could result in £24,500 cashback.

Why do companies still miss out?

This varies, some of the reasons we can have seen are:

• Research not performed in a formal research department is not identified.
• Not realising how much software projects can qualify.
• Disregarding unsuccessful research, or secondary research programmes on the development stage or product upgrades.

Practical issues

1.Defining research.

The published guidelines run to many pages but the touchstone now is showing the resolution of technical uncertainty. This involves seeking an advance on what experts already know.

2.Other conditions of qualifying.

SMEs need to consider how grants and IP ownership issues could limit their claim, as can whether they are controlled by another company. A cap of €7.5m for spend by SMEs attracting a cash back credit applies from 1 August 2008.

3.Getting all the relief due.

This needs the company to identify the qualifying spend on staff costs and consumable stores. SMEs can claim on 65% of subcontract costs.

Identifying capital expend on R&D can lead to an immediate 100% deduction, rather than in the case of plant 10% or 20% allowances each year-or none at all for a building.

We have seen companies able to restructure to avoid some of the pitfalls in the R&D rules.

How we can help

We can bring our experience to bear in:

• helping you see which activities may qualify as research.
• identifying the full extent of qualifying spend
• preparing a claim and ensuring the appropriate evidence and documentation is available.
• liaising with HMRC R&D specialists, either in advance or in defending a claim

Other issues

Businesses undertaking R&D will generally exploit the IP, for example by taking product to market or under licence. This may sometimes involve working with other group companies overseas. Simply seeking to claim as much UK R&D relief as possible will often not be the end of your best approach to saving tax, or even sometimes the best start.

We can help you look at where it may be most tax efficient to create or hold IP and cross border issues such as withholding tax, IP transfers and transfer price. We see it as important to consider what may best save tax in the longer term.

For more information contact:
Abbas Sadak