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Complex tax rules are preventing small technology companies from taking advantage of research and development (R&D) tax credits, according to accountancy firm Grant Thornton.

The Inland Revenue has launched a consultation document on the tax credits, which are available to “innovative” technology businesses.

But many firms, especially sole traders and partnerships, do not qualify for the R&D relief because of the complex rules that surround the tax credits, Grant Thornton says.

According to Grant Thornton the Inland Revenue's definition of technology businesses is much too narrow and is damaging many fast-growing start-ups.

Alan Boby, tax partner at Grant Thornton, called for the government to improve the value of the tax relief.

“Currently, because of the strict definitions and limits applied to the term ‘innovation’, some of the UK’s most technologically forward-thinking companies are missing out.

“What’s more, only companies qualify for R&D tax relief. This means that many small to medium sized enterprises, which are set up as sole traders or partnerships, cannot claim this vital financial support.

“Ironically, it is just these sorts of organisations that the government claims to want to help most,” he said.

Many small firms are also losing out because they have to pay for new software for R&D work, which isn’t covered by the tax relief, according to Grant Thornton

It has sent a letter to the Inland Revenue as part of the consultation, calling for action to make the R&D tax credits more attractive to small technology companies.

Boby said that the credits’ incentives need to be reviewed to make a “real impact” on businesses in practice.

“The government has already acknowledged that take-up of R&D tax credits has not been as high as they hoped.

“As a result, they have issued a consultation document and invited comment from the industry. This is an encouraging step forward, however we remain sceptical as to how far they will be prepared to simplify and relax the rules for claimants,” he said.

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