Complex Rules Prevent UK SMEs From Taking Up R&D Tax Credits
by Jason Gorringe, Tax-News.com, London
03 November 2003

Financial advisory firm Grant Thornton has criticized the complex rules surrounding the government’s Research and Development tax credits, arguing that the regulations are preventing many small firms from claiming this often vital source of financial support.

Specifically, Grant Thornton is worried that the government’s complicated definition of what constitutes a technology firm means that many sole traders and partnerships do not qualify for the R&D credit.

"Currently, because of the strict definitions and limits applied to the term 'innovation', some of the UK's most technologically forward thinking companies are missing out," Alan Boby, tax partner at Grant Thornton commented.

"What's more, only companies qualify for R&D tax relief. This means that many small to medium sized enterprises (SMES), which are set up as sole traders or partnerships, cannot claim this vital financial support," he added, continuing:

"Another blow to SMEs is the exclusion of bought-in software costs in R&D claims. Many R&D projects rely on the use of bought-in (rather than internally developed) software to carry out effective work.”

“The present rules do not include the cost of bought-in software, which seems to prejudice those companies that cannot afford to develop their own software compared to those who can”, he observed, concluding: "The Government has already acknowledged that take-up of R&D tax credits has not been as high as they hoped. As a result, they have issued a consultation document and invited comment from the industry. This is an encouraging step forward; however we remain sceptical as to how far they will be prepared to simplify and relax the rules for claimants."

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