Research and Development Tax Incentives
“It Covers More Than You Think”
Research and development (R&D) tax credits are a valuable government tax relief that rewards UK companies for investing in innovation.
Expenditure qualifying for R&D relief is available at a rate of up to 230%. It is open only to Companies who are subject to corporation tax. So, if you spend £200,000 on R&D, your business can claim £460,000 against profits chargeable to corporation tax. That’s £260,000 more relief than you would otherwise receive. At a corporation tax rate of 19%, that is a total tax saving of £87,400 on £200,000 expenditure.
If you are loss making and meet the conditions of a small/medium size company, the enhanced R&D relief can be turned into a repayable tax credit of 14.5% of the enhanced figure (or loss for the year, if lower). So, a £66,700 tax repayment in the above example. Equally, losses can be carried forward and back in line with the normal corporation tax rules, as opposed to seeking a repayment.
In addition to the generous revenue expenditure relief, capital allowances of 100% are available on qualifying capital R&D expenditure.
As the relief is so generous and HMRC have recently undertaken a marketing campaign to promote the relief and remind businesses to claim, there are strict conditions. R&D is available for any UK company which undertakes a problem-solving activity to develop new and improved products and/or new and improved processes.
IT and software development account for a quarter of all R&D tax relief claims submitted to HMRC, and can be some of the most complicated to prepare, understand and assess. Much of the challenge stems from applying the definition of R&D for tax purposes to what can be quite an abstract and difficult area to understand for those not familiar with software development, including HMRC.
To address the difficulties, HMRC are scrutinising software claims more closely and have started to consult their in-house ‘technology office’ to check that the projects included in claims meet the definition of R&D. The technology office includes specialists with backgrounds in, among other skills, databases, mobile technology, software architecture and networks. In addition to providing input on a case by case basis, they have also begun a programme to educate the wider R&D specialist teams in software development in the context of the guidelines on the meaning of R&D.
The result of this development is that we are likely to see more queries being raised in respect of software/technology claims making it more important to ensure that eligible projects are accurately identified and adequately described in the context of the strict definition of R&D.
The following are some of the frequent issues that the HMRC technology office noted in their assessment of software claim descriptions:
- Quoted advances are frequently business related rather than technical in nature;
- Over-use of certain terms which lack substance for example, agile, synergy, efficiencies;
- Uncertainties are generic and should be more specific.
HMRC have stated that they will be looking for much more substance in their review of technical descriptions and have offered the following advice to those identifying and describing projects:
- Ensure that the requisite advance identified is technological or scientific in nature rather than business related;
- Be specific in identifying technological or scientific uncertainty and where possible, these should be directly related to the associated advance in technology; and
- It is helpful to explain the solutions sought to address the technological uncertainty explaining why normal approaches are not adequate.
To date Harbour Key have never had a R&D claimed challenged, however this position may be changing. HMRC have felt they are behind the curve on the technical issues surrounding software development and want to catch up, it is therefore important that the narrative supporting claims are drafted well and meet R&D qualifying conditions.