Brian Williamson: Taxing questions for R&D at firms large and small

IT’S A terrible thing when grumbling becomes the default option. Technology companies have become so used to being treated with baffled indifference by Whitehall that there sometimes seems little else to do. Especially when asked to take part in another consultation.

The “Why bother?” instinct soon kicks in in a sector which has produced some of the UK’s brightest innovation, yet has consistently failed to secure enough governmental interest – let alone funding – to exploit it.

So it was rather unsettling when HM Revenue & Customs, after a first consultation on research and development tax relief which ended last November, incorporated a number of improvements suggested for SMEs into the 2011 Budget, including an increase in the amount to be claimed from 75 per cent to 100 per cent, and then 125 per cent next year.

Perhaps we’re just not used to being listened to any more. But the Revenue’s willingness – its positive and very welcome willingness – to see the logic of someone else’s argument augurs well for research an development (R&D) relief schemes continuing to encourage companies to carry out vital research and to attract internationally mobile R&D into the UK.

It was also encouraging that HMRC called for further consultations in June this year and asked for more discussion aimed at lowering the hurdles faced by companies claiming credit and providing greater clarity about what costs qualify for relief. The response deadline is now past and the tax authorities will ruminate on them before presenting their conclusions to government, but it is worth reflecting on what key players in the high-tech industries see as the way forward.

Larger companies have argued for an above-the-line credit system, where the relief directly reduces the company’s tax liability, on the grounds that it is likely to direct the benefit to the R&D department rather than the finance director’s office. But there would be enormous complexities in keeping large and SME programmes consistent in terms of the tax benefits that they deliver and it is difficult to see that changing the mechanism would make any difference to the levels of R&D investment.

With above-the-line, there are also issues to consider regarding loss-making companies, where the Revenue rightly asks if the credit would need to be payable if the company did not have enough corporation tax cover.

SMEs typically do not share the problems faced by large companies, in which one department invests time and effort in a claim only to see the benefits absorbed by a different part of the organisation, so there is no upside to above the line changes for SMEs. It does seem, from the SME perspective, to be an unnecessarily heavyweight solution to a problem that could be resolved by better communication and internal agreements between the departments and divisions of a large company.

A much more important matter is the retention of relief for qualifying indirect activities, a welcome extension which has seen the value of claims increase by between 10 per cent and 15 per cent.

This is especially valuable to larger companies which employ staff to support those in key development positions.

Subcontracting has always been a contentious area and both of the proposed solutions to allow the subcontractor to claim the large company credit – certification from the customer that the work is qualifying R&D or a joint election between both parties – may be problematic in practice.

A much simpler, even elegant, option might be a straightforward check box which allows a large company to specify whether the contract with the subcontractor is for work that is part of the large company’s R&D projects.

Simplicity is the key, and the current regime appears to have an inclination towards the kind of clarity and transparency in R&D tax affairs that the technology sector has been calling for since the first Sinclair ZX. It would be nice to be listened to.

• Brian Williamson is director of R&D tax credit specialist Jumpstart.