I attended and presented at a seminar this morning run by Innovation Lincolnshire about innovation and doing things differently.

We talked about a lot of issues as a group and decided that actually whilst there are many definitions for innovation it can actually simply mean doing things differently.

I talked in my presentation about HMRC’s Research and Development Tax Credit and Tax Relief system and as promised to the attendees I have attached an article I wrote for the Lincolnshire Echo below. Each year around 4,500 people take advantage of the scheme.

R&D Tax credits and Allowances

The excitement and fanaticism shown recently in the US by people wanting to be the first to own the new Apple iPhone was a reminder of the importance of innovation and creativity in business.

But it is not just large multinational organisations that can benefit from thinking creatively. Small organisations can also reap the rewards of innovation and creativity.

Large scale research and development of new products is often not within the tight financial and borrowing constraints that exist within the SME market but there may be some help available.

It is possible for SME’s (companies with fewer than 500 employees and either turnover less than €100m or balance sheet assets of up to €86m) that have qualifying projects to claim Research and Development tax credits and capital allowances in respect of relevant expenditure.

R&D tax credits, also known as R&D tax relief, reduce your taxable profits and can create taxable losses. This can therefore reduce the amount of Corporation Tax that you pay or can lead to cash back from the Government via R&D tax credits that are payable.

R&D tax credits are offset against profits at a rate of 150% of the eligible R&D cost. (Subject to approval the rate will increase to 175% of qualifying expenditure from 2008/09) In order that you can claim this relief you must be a company and must have spent more than £10,000 in an accounting period on R&D.

If there are no profits to offset, the expenditure against the tax credits can be surrendered and paid in cash at a rate of up to 24p for every £1 of actual expenditure.

There is, however, a claw back of the allowance if assets are sold. In addition land and buildings are excluded and the relief can be reduced if projects are subsidised or have attracted grant funding.

The definitions used to decide whether a project and its associated costs fall within the R&D allowances and reliefs are extremely complicated, and details of the specific project need to be carefully reviewed against the guidance provided by the DTI and HMRC.

As an initial guide though, if a project involves having to develop scientific or technological knowledge that isn’t commonly available, you may qualify. This usually involves the creation or appreciable improvement of a product, process or service where you are required to develop knowledge but does not include learning new knowledge yourself.

It does exclude simply being innovative in a commercial sense, or projects where you may purchase new technology, but may be available if you adapt or change products for your own purposes if it involves scientific or technological advances.

If you do qualify for the relief then it is essential that you maintain good records about the expenditure and it may be worth creating a separate department within your accounting system’s nominal ledger so that costs can be identified easily.

The whole area of R&D tax credits and allowances is complex but according to HMRC over 4,500 SME’s claim around £250m in tax relief each year, so it is certainly worth investigating.