Taxation – Revenue soothes R&D credit fears

The Inland Revenue has moved to dispel fears that research and development tax credits in the Budget will force software companies to capitalise their research costs, writes Nick Huber.

The proposals for 50% tax relief will apply from next year to small and medium-sized companies spending over #50,000 a year on R&D, in addition to the existing 100% tax relief on research. In the absence of clear accounting treatments and definitions of R&D costs, the Revenue consultation paper suggests that direct staff and material costs on research will qualify for the credit. Expenditure would be recognised for the R&D credit in the same period it is recognised as a class 1 deduction.

At the BASDA agm in London earlier this month, association chairman and Tas Software managing director Theo van Dort summarised the industry’s suspicion about the credit: ‘Last year, we were concerned that the ASB and Inland Revenue would make us capitalise R&D. Is the credit a way to find out what companies are doing with R&D and then, in two or three years time, they will move the goal posts so we will have to pay tax on it?’

Responding to these fears, David Shaw, assistant director of the Revenue’s tax division, stressed that the tax credit was not designed to push software companies into capitalising their R&D. ‘The tax treatments are the same whether R&D is capitalised or not,’ he said.

The Revenue maintains that research can be written off or capitalised if it creates an obvious asset. Under the new relief, a company paying corporate tax of 20% would pay around a third less tax on its R&D investment. Non-taxpaying start-ups can cash in the tax credit against future profits, and claw back 24% of their R&D costs.

Shaw added that the government’s consultation process aimed to clear up any confusion over the definition of R&D and called for a greater input from the software industry. ‘We’re trying to get workable guidelines and remove uncertainty.’

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