Research and development tax credits

The business world has long talked about the benefits of an 'enterprise economy', where innovation, and research and development (R&D) are at the core of corporate strategy. However, evidence suggests that in the UK, businesses are not taking full advantage of the mechanisms already in place to encourage the R&D activity that such an economy thrives upon.

R&D tax credits were established to help drive innovation in the UK. They offer companies that carry out R&D activities the opportunity to reduce their tax bill.

The type of activity that qualifies for R&D tax relief is wide-ranging and sometimes challenging to apply in practice. However, these activities would normally meet one of the following criteria:

• Constitute an advance in the field; and
• Resolve scientific or technological uncertainty

The Government has made a number of changes to the R&D tax regime since its introduction in 2000. As a result, awareness of the potential range of application of incentives is limited and companies are struggling to grasp the increasing numbers of opportunities available to them.

According to our research, average take-up levels are low. About *33% of small-to-medium-sized enterprises for whom R&D tax credits are relevant did not claim them largely because the application process is perceived to be complex.

R&D costs that are eligible for the incentive fall into four main categories:

• Staffing costs
• Consumable and transformable materials
• Externally provided workers
• Payments to qualifying bodies/contributions to independent R&D efforts

Companies should aim to develop a clear, effective methodology to support and record its R&D projects in order to make claims efficiently and maximise their effectiveness. To ensure a successful claim, a company should support its application with satisfactory documentation, enabling HM Revenue & Customs (HMRC) to verify that its rules are being adhered to.

At PricewaterhouseCoopers, our team of specialists are experienced in maximising companies' R&D claims, and we have assisted some companies to increase their R&D claims by as much as 400%. We have extensive experience in developing practical claim processes that are robust, unobtrusive, easily repeatable and in line with HMRC's requirements.

*PricewaterhouseCoopers survey, June 2006