Research & development (R&D) relief is available for companies that undertake qualifying R&D activities. R&D is defined by reference to DTI Guidelines.

Broadly, these guidelines provide that a project which seeks to, for example,

• extend overall knowledge or capability in a field of science or technology; or
• create a process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology; or
• make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes; or
• use science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way (e.g. a product which has exactly the same performance characteristics as existing models, but is built in a fundamentally different manner)

will be R&D for tax purposes provided that the project seeks to achieve an advance in overall knowledge or capability in a field of science or technology.

The detailed criteria requirements can be accessed using the following link http://www.hmrc.gov.uk/manuals/cirdmanual.

Which costs qualify for R&D tax credits?

Companies can claim for their revenue expenditure on

• costs of staff who are actively engaged in carrying out R&D,
• consumable or transformable materials used directly in carrying out R&D (broadly, physical materials which are consumed in the R&D), and
• power, water, fuel and computer software used directly in carrying out R&D.

The relief is given by allowing a further deduction against the profits chargeable to tax of a further percentage of qualifying costs. The percentage varies depending on the size of the company and whether the costs are direct or subcontracted.

For SME’s with direct staff costs the current relief rate is at 150% and from April 2008 this is planned to rise (subject to EU State Aid approval) to 175%. For these companies R&D losses may be sold back to the Revenue for cash (capped at the total PAYE liability for the year). For large companies and for subcontracted R&D the relief is 125%, again planned to rise from April 2008 to 150%, with no cash alternative.

Companies can claim a 100% capital allowance on plant, etc directly related to the R&D work e.g. test equipment, cars for dedicated researchers, etc.