Thousands of small businesses are missing out on research and development grants worth a total of £125m each year and could find themselves ineligible to backdate claims if they do not take action now.
Business advice company Grant Thornton suggests many small companies are simply unaware that they could claim such awards, while law firm Howard Kennedy is warning that from April 2008 companies will only be able to backdate claims by two years rather than the current six.
"Hundreds of millions of pounds in credits and interest on overpaid tax will be lost overnight by UK companies unless steps are taken now to apply for retrospective claims to which they are entitled before the 1st April 2008 deadline," warns Justin Bryant, a tax partner at Howard Kennedy.
Since their introduction in 2001-02 an estimated £1.76bn has been given away to companies engaging in research or development through either tax breaks or cash claims. Those in the technological development sector are especially likely to benefit from such grants, Grant Thornton suggests.
Yet the percentage of research and development credits as a proportion of gross domestic product has remained relatively static, falling from 1.78% in 1997 to 1.75% in 2005. This compares unfavourably with other European countries such as Sweden (3.9%), Finland (3.4%) and Germany (2.5%), as well as the US (2.6%) and Japan (3.1%).
According to Sarika Patel, head of technology at Grant Thornton, many businesses are unaware of what counts as research and development. "Research and development is no longer the sole domain of scientists in lab coats and is potentially a facet of every business," she said.
"Anything that adds value to a product or process is potentially entitled to tax relief, but in our experience businesses are not actively looking out for this.
"Tax credits apply to a wider range of sectors than some might imagine and can include work undertaken in manufacturing, food processing, consultancy, automotive and even construction," she added.
Grant Thornton claims examples of businesses that have claimed research and development tax relief where previously some might have thought they did not qualify include a company that developed an electronic document management system and food producers who have developed innovative manufacturing processes.
The company is calling on the government to expand the definition of what qualifies for such credits and to make businesses more aware of how they can benefit. "It is possible that non-technological sectors, such as the financial market, could produce serious benefits for the UK if they were encouraged," added Patel.