Clampdown coming on research relief

Experts believe the taxman is about to take a much harsher stance on tax reliefs for research and development.

Tax advisers at Grant Thornton believe HMRC is to launch a twin pronger attack. Firstly they believe the taxman will shut down relief on the production of prototypes that end up being sold to consumers rather than being scrapped. Secondly, it clamp down the claims businesses can make on staff time insisting that no worker can spend all their time on research.

GT tax partner Samamthan Vanags said the firm was experiencing much more resistance and challenge on these issue from the taxman leading the firm to believe that official policy would soon change.

'These new interpretations will make life particularly difficult for the many leading-edge engineering and technology companies which are already adversely affected by current economic conditions.

'Clamping down in this area goes directly against the original purpose of the relief which was to stimulate R&D activity in the UK. At a time when the UK's income from other sectors such as financial services has declined, measures like this, which will reduce the effect of the fiscal stimulus on businesses, seem very short-sighted,' she said.

HMRC said in response: 'HMRC’s role is to help companies obtain the relief that they are entitled to, while policing the rules and boundaries of the R &D schemes fairly. HMRC does not operate any limit on the amount paid out.

'The R&D tax credit schemes form part of wider Government action to encourage UK companies to undertake more R&D. So, the only target we are working towards is to provide support to companies that are undertaking qualifying R&D activity.

'The DTI Guidelines specifically exclude production of goods or services from the scope of R&D for tax purposes, and so no relief is available for the costs of production activity. However, other activities carried out alongside the production can qualify.

'So while production costs would be excluded a company might be able to claim, for example, for design work, parts consumed in testing, construction of scale models, computer modelling and other costs.

'What is likely to be disallowed are the costs relating to the building of the finished article in terms of materials and labour. In some cases this could amount to only a small proportion of the total costs, depending on the difficulties encountered in reaching the final product.'