R&D tax credits ‘too confusing’

13 February 2004 UK companies are missing out on hundreds of millions of pounds worth of research and development (R&D) tax credits as a result of over-complicated rules.

In July 2003 the government earmarked £500 million (€740m) to support R&D among UK biotech and high-tech business. But a survey conducted by consultancy firm Ernst &Young estimates that only £350 million (€520m) was claimed by about 6,000 companies in 2002-03, one in four of the companies eligible, according to the accountancy firm.

This is because most companies are either unaware of the break, have difficulty identifying eligible activities, or think the cost of claiming outweighs the benefits, according to the survey.

The R&D tax credit, which allows companies to claim enhanced tax relief for their qualifying R&D spending, was introduced by Chancellor Gordon Brown in 2002 in an attempt to boost Britain’s position in science and technology research.

Last year Brown extended the credit so that companies would be able to claim back the cost of software and power used for R&D purposes. In this way, the government hoped to make it easier for companies to decide at the outset of a project whether they would be eligible for credit.

The changes were also intended to close a loophole that denied the credit to large companies that contracted out R&D. “I want Britain to be the best location for science research and development,” Brown had said in December 2003.

According to the Inland Revenue, a small and medium-sized business (SMB) that is carrying out R&D is now able to claim 150% of R&D tax relief. A large company (or an SMB doing contract work) is able to claim 125% of tax relief.

However, the Inland Revenue has been criticised for challenging claims and being difficult to deal with over the definition of software for tax credits, says Tim Wills-Sandford of the technology industry trade body Intellect. Furthermore, the Revenue is still drafting the changes announced in last year’s report.

But despite the confusion the new rules have provoked, the credit has been well received by biotech and IT industries. Companies received an average cash sum of more than £800,000 (€1.2m) in 2002 and this figure is expected to be higher in fiscal 2003.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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