Tax reform set to boost R&D

As much as £280 million in research and development tax credits has been left unclaimed in the IT sector alone. New arrangements, which come into force next month, will act as a more direct incentive, says Alasdair Poore

Above-the-line (ATL) research and development tax credits for large companies come into force in April. Corporate heads of R&D are hailing the move as the most significant change to UK R&D taxation in a decade.

Until now, R&D tax credits have left many innovative companies uninspired. Introduced a decade ago, they have undergone successive changes. Many smaller companies have been unwilling to invest time in understanding whether they can benefit. Surveys show poor take-up by small and medium-sized enterprises (SMEs), with up to 33 per cent not claiming benefit, leaving £280 million unclaimed by the IT sector. There are stories of accountants being sued for failing to advise properly. Even HM Revenue & Customs is reported to be surprised that more companies have not made claims.

ATL R&D tax credits are aimed at large companies. The government has already improved the impact of R&D tax credits for SMEs, increasing the rate of “superdeduction” to 125 per cent and permitting wider recovery of cash repayments for non-profit-making SMEs.

Even HM Revenue & Customs is reported to be surprised that more companies have not made claims

For larger companies, ATLs will allow them to show the credit “above the line” so that it is more visible as a reduction in R&D costs. This will be a more direct incentive for research departments, rather than a benefit understood mostly by tax departments. The ATL credit will also allow large, loss-making companies to obtain a direct cash return on their R&D expenditure, a benefit previously restricted to the small company scheme.

One difficulty with R&D credits has been a failure to understand how widely they can be applied. The legislation requires eligible R&D projects to be technologically oriented, with a degree of uncertainty in outcome. It was often assumed that a project was too mundane or predictable to qualify, particularly in the software field, where a large part of work in innovative industries now occurs, and even in fields such as healthcare.

Patent attorneys and are very familiar with this type of problem. Inventors fall into two categories – those who believe they have made the most exciting innovation ever and those who think what they are doing is completely ordinary. In practice, inventions fall along a complete range, from highly innovative to ones which are hard toil with an uncertain result.  Many software developments fall into this category. To improve take-up, a change in mindset is needed.

The government consulted widely over these proposals. It had more than 70 responses, from technology companies and accountancy firms. Most eligible companies already use the services of those accountants, who will no doubt be providing appropriate advice. A priority now is to ensure that heads of R&D are made aware, as early as possible, of what sort of R&D is eligible. Then they are likely to feed the potential credit into their budget planning for innovative products and services.

Alasdair Poore is a past-president and council member of the Chartered Institute of Patent Attorneys, and a registered trade mark attorney with wide experience in the exploitation and protection of ideas and research emanating from both public institutions and private companies.