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Are you missing a trick? R&D tax relief for software companies

The explosion of activity in the technology sector is now also being heavily backed by HMRC, which has provided £1.75bn in R&D tax relief with a view to promoting innovation in several sectors.

Despite an increase in the number of claims being made over the last few years, awareness of the R&D scheme in general remains lower than expected, and an understanding of the type of activities that qualify for relief even lower. For those in the software industry, the constant flux and state of evolution of products and platforms can make it difficult for companies to know whether they can make a claim for relief.

What is eligible for relief?

The Government definition states that it is looking to aid projects which 'seek to achieve an advance in science or technology…through the resolution of scientific or technological uncertainties'. While this definition appears to be inherently subjective, it is presumably deliberately broad in its scope to enable it to apply to new technologies that might emerge in the future. Nonetheless, that still leaves many tech companies grappling with how or if the definition applies to their businesses. Software developers find themselves struggling to determine whether their work is advancing knowledge in the sector and is genuinely innovative.

Interestingly, for a project to be eligible for R&D tax relief it does not have to be 'new' in the common sense of the word. An advance which was already in existence can qualify if the information is not readily and publicly available. Moreover, projects that are not developed from scratch but are the result of packaging up or combining existing products or platforms can also be eligible, as long as this results in something genuinely new.

The project does not even need to be successful in order for R&D tax relief to be claimed. Strangely enough, the fact that a project has failed can often be used as evidence of the project involving genuinely pioneering work.

To assist with this uncertainty and encourage more claims to be made, HMRC introduced an R&D advance assurance procedure towards the end of last year to allow business owners to determine whether their project will qualify for relief. This is available for companies who have never previously claimed R&D relief, have less than 50 employees and a turnover of less than £2 million.

The benefits of an advance assurance application mean R&D claims will hold for the next three years without further enquiry, which can save the need to update R&D reports in years two and three.

The process

The advance assurance form is in a format similar other HMRC forms where you can enter the information online, with the following information required:

Part 1: Determines whether the company meets the criteria for R&D advance assurance

Part 2: Asks for company details

Part 3: Asks for contact details which can be the company or your advisors

Part 4: Questions the advance assurance, requesting details of the proposed R&D activity, the advance being sought and the uncertainties involved.

Part 5: Asks for expected costs of project

Whilst it would be expected that assurance will be given greater scrutiny than some of the smaller R&D claims that are being made now, the benefit of three years of claims being approved may outweigh the increased scrutiny.

It is envisaged that a claim for advance assurance will take three months from application to sign off by HMRC, although companies or their advisors can expect a phone call from the R&D unit within three/four weeks of the initial application being made.

Companies should expect HMRC to request a breakdown of expected costs to accompany an R&D claim. Whilst advance assurance will not be restricted to the amount specified on the assurance, HMRC will want to receive updates of how the project is going and if there is a pivot in the project, such as greater than expected level of investment or a new activity undertaken.

Unfortunately it will not be the case that companies who have been given R&D assurance will have their tax credits automatically processed. These will still need to be individually verified by an R&D inspector, potentially as if no claim for advance assurance had been made.

On the basis that the assurance itself is not going to see an R&D claim processed any quicker, an advance assurance may not be suitable for companies that have passed their year ends, but could be something to do for those companies looking to start projects in the future.

Certainly where an assurance program is new, companies must be prepared for HMRC to ask a lot of questions before assurance can be granted. We, as advisors, are likely to therefore wait to see how onerous the experience of obtaining assurance is before recommending our clients down that route.

Is the R&D scheme right for you?

R&D tax relief provides an enhanced corporation tax deduction for companies qualifying under the Small and Medium Sized Enterprise Scheme equal to 230 per cent of qualifying R&D expenditure. R&D tax credits are then available for loss making companies at 14.5 per cent of this enhanced deduction (or the Company’s enhanced corporation tax loss for the period, if lower). A claim can be made up to two years from the end of the accounting period in which the R&D qualifying expenditure is incurred.

The bottom line is that it pays to examine your company’s eligibility for R&D tax relief. Previous projects that have been accepted by HMRC include the development of mobile applications for the hospitality industry and the translation of software into foreign languages, so it is worth giving the scheme a go. The Government is keen to promote the funds available and these could offer welcome relief for many companies who may currently be missing out.

Mark Shewring, Tax Partner at haysmacintyre