Chancellor dangles tax carrot

The government is to consult industry on whether all software development work should qualify for R&D tax credits. Such a move could enable firms to apply for tax relief on a wide range of projects, including the customisation of software packages, experts said.

Chancellor Gordon Brown pledged to reassess how R&D tax credits are awarded in his Budget speech last week. The scope of R&D tax credits has led to much debate since their introduction in 2000, particularly in the area of software development, according to Nick Cassidy, a senior tax consultant at Ernst & Young.

"The question is how do you identify qualifying expenditure," he said. "When firms buy off-the-shelf products and adapt them for their own ends, does this count as R&D? Even the Inland Revenue has differing views on this."

The R&D tax credit currently allows a company to claim an enhanced tax deduction on any money it spends on an eligible R&D project. Small and medium-sized firms can claim a deduction of 150 percent of their expenditure or can receive a cash rebate by surrendering their credits to the Exchequer. Large firms can claim a deduction for 125 percent of their qualifying expenditure.

Firms will be able to claim tax relief on the salaries of staff working within R&D, depending on the proportion of time devoted to development. Brown said the government will abolish the previous qualification threshhold of 20 percent of work time.

"The consultation will start in the next couple of months," Cassidy said. "These credits are money for nothing. Firms should take it as far as they can when doing their tax returns."

Meanwhile, another Budget change will enable nearly four million firms with annual turnover of less than £20m to claim 100 percent tax breaks on their IT investments until 31 March 2004.

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