The Government is keen to see more successful claims for research and development (R&D) tax credits, particularly from small and medium-sized businesses, but many company directors find the rules and constant changes difficult to follow.
At the moment, more than 15,000 firms claim R&D enhanced tax relief per year, taking advantage of the 125 per cent mark-up in the value of deductible costs, which will increase to 130 per cent from 1 April this year, and a payable tax credit of 14.5 per cent where a loss is surrendered.
However, because the rules of the R&D scheme, which has been in existence for almost 15 years, keep changing, small business owners complain that it is too complicated to claim or worry that claiming could attract a tax investigation.
Therefore, the Office of Tax Simplification (OTS) has suggested that HM Revenue & Customs (HMRC) should enhance its guidance into R&D tax claims by including more case studies and should also provide clear guidelines on what qualifies as R&D software development and where the capital/revenue boundary lies. The OTS is also suggesting that the department could make it clear what costs are counted as qualifying costs in an R&D project.
However, the Government is not convinced that these suggestions will be enough to persuade more firms to invest time and effort into the research and development of new products or process, which is the underlying aim of the R&D scheme.
It is therefore consulting on how to make smaller firms more aware of the tax relief and is looking for suggestions on how to redesign the rules of the relief to make them more suitable for smaller firms.
The consultation, which closes on February 27, is also looking for ideas that would enhance the understanding of the scheme rules and how to help smooth out the claims process.