Overview of the Research and Development Tax Credits Scheme for UK Startups

Research and Development Tax Relief is a scheme run by the UK government, that is designed to promote investment in scientific and technical innovation, providing companies with an extra tax allowance to reduce their tax bill or in the case of loss-making SMEs, to receive a cash credit from HMRC.
This takes the form of an enhanced 175% tax deduction on eligible expenditure which for loss-making companies can be surrendered for a 14% cashback providing a net benefit of 24.5% of the qualifying expenditure.
UK Small and Medium-sized Enterprises (SMEs) that carry out research and development (R&D) will find it easier to claim additional tax relief, thanks to a relaxation in the rules for claiming R&D tax credits.
The removal of the intellectual property condition became law in the Finance Act 2010 and small and medium businesses will now be able to apply the new rule to any expenditure on R&D in an accounting period ending on or after December 9 2009.
Previously, in order for an SME to make an R&D tax credit claim, they had to have had ownership of the Intellectual Property Rights.
The practical benefit of the new arrangement is that SMEs who sell the fruits of their R&D labour including the IP rights, but who also want to make an R&D Tax Credit claim, can now do so taking advantage of this generous cash incentive. Other winners are university spin-offs performing R&D where the IP remains with the university.
The Dyson Report, that was commissioned by the Conservative Party in 2009, before the General Election sought to promote the UK as a place for performing R&D by specifically targeting startups and innovative small companies. As a result of this, it was announced that despite swinging cost-cutting, the R&D tax credit scheme would remain, and continue to target the most innovative companies. This policy has been continued in the post-election climate with the recent Treasury consultation on the future of the R&D scheme which has taken place amidst vigorous lobbying from different industry bodies.
The results of the Treasury consultation will not become apparent until the 2011 Budget but it is widely expected that the benefit available for spin-offs and startups is expected to increase further.
The SME scheme is open to UK companies with fewer than 500 employees, an annual turnover of less than €100m and a balance sheet not exceeding €86m. Annual spend on R&D must be a minimum of £10,000.