Relaxed rules on R&D tax credit for SMEs

Under the current rules, small and medium-sized companies (SMEs) can apply for a repayable tax credit of 24.5%, or an enhanced deduction valued at 75%, of qualifying research and development (R&D) costs. However, until now this benefit was only extended to companies that owned the intellectual property (IP) relating to the R&D carried out within the business.

By way of example, if an engineering company was carrying out qualifying R&D on a technology that was owned by a third party, there would be no opportunity to claim the SME relief. Equally, if an entrepreneur set up a company to develop and market a product while retaining ownership of the IP in his own name (rather than transferring it to the business as an asset) the SME relief would likewise not be available to the company.

However, the 2009 Finance Act will allow businesses with fewer than 500 employees and a turnover of less than 100 million euros to take advantage of the tax credit scheme, even when ownership of the IP lies elsewhere. The scope of the Act will thus extend a little way beyond the SME sector as the100 million euro turnover limit is higher than the 86 million euro threshold that normally defines a small or medium-sized company within the European Union. The new rules are intended to apply with effect for accounting periods ending on or after 9 December 2009.

In a very recent, but separate, development HMRC has announced that they will now permit the cost of indirect activities to be included in an R&D claim. Until now only direct costs have been permissible. This will mean that costs such as secretarial time supporting R&D staff and relevant training time can now be included in a claim.