The UK’s technology sector is widely acknowledged as one of the fastest growing areas of the economy, with Prime Minister Theresa May describing it earlier this year as a "great British success story". Reinforcing this statement, and despite the spectre of Brexit and its potential impact, investment in digital businesses rose across Britain last year according to the 2017 Tech Nation report. The report also revealed that the UK leads the way in Europe, attracting £28bn in technology investment since 2011, compared with £11bn in France and £9.3bn in Germany.
Given these statistics, it’s hardly surprising that London’s digital industry is a major force in both the capital’s and the nation’s economy. In fact, London was ranked the number one city in Europe for supporting start-ups and scale-ups in the European Digital City Index. It also has a reputation as a leader in the development of artificial intelligence. With all the political and economic uncertainty since the triggering of Article 50 and the general election result, it’s important to keep it that way.
One of the ways in which the industry has been supported in leading the field is by encouraging research and development through the process of R&D tax relief. However, although many companies operating in the sector are eligible, it seems that some aren’t taking advantage of the tax reliefs they are entitled to.
Why don’t more companies claim?
There were over 22,000 R&D tax relief claims made in 2015, but despite having a reputation as a research and development based industry, only one quarter of those claims came from the ‘Information and Communication’ sector - equating to just over 5,000 of claims across the UK. There are currently around 40,000 tech companies in London alone, so why aren’t more companies taking advantage of R&D tax reliefs?
It’s certainly not a lack of incentive: the average tax benefit we were able to claim at Jumpstart for the software and IT sector came in at £37,000 per claim – a healthy return on the process for an SME, and a useful financial benefit for a larger tech company.
One of the reasons that many companies fail to apply is that they simply don’t realise that they’re eligible, as they may be unaware which activities qualify. It doesn’t just apply to scientific research by people in white coats and labs. For example, within the technology industry, many software development projects may qualify.
What kind of projects qualify?
To use the software example, if a company has developed a new software product or process and there have been difficulties and challenges for a software developer, R&D tax relief may be available. So, in software development, activities that might qualify could include:
- Improving existing systems e.g. increased performance, security or improved scalability
- Resolving a problem within hardware or software
- Developing new operating systems
- Video games development e.g. graphics, sound or playability
The project doesn’t even have to be successful. However, the amount you can claim varies depending on whether the business is making a loss, breaking even or profitable.
According to HMRC’s criteria, a company may be eligible if a project seeks to ‘achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty’. You must be able to show that your company is involved in activity to develop technological solutions not currently available. The business must also be a limited UK company and liable for Corporation Tax. Claims can be made within the company’s last two financial years.
A simple way of relating this to an activity is to think about the initial stages of the project. If you were uncertain about whether the intended outcome would work, that’s technical uncertainty. Likewise, if it took time to understand and diagnose an issue and then to develop a prototype based on your solution, this too is technical uncertainty.
Costs incurred are also chargeable and include:
- staff and subcontractor costs
- materials and consumables
There are different schemes for SMEs and large companies. SMEs must have less than 500 FTE staff and revenue of less than €100m or balance sheet assets of less than €86m. For SMEs, the rate of R&D tax relief can be up to 230 per cent on qualifying R&D costs. Companies can potentially claim up to 33.35 per cent of eligible expenditure depending on their circumstances. The large company scheme applies to companies with over 500 FTE staff or with revenue greater than €100m and balance sheet assets greater than €86m. The R&D tax relief for large companies is currently 130 per cent. Even if the company is making a loss, it may be eligible to claim and receive a cash credit.
Making a claim
Taxation isn’t known for its simplicity and the claims process can be quite complex, which is why many companies get an R&D tax relief specialist in to submit and manage a claim. HMRC requires that the technical reports for R&D tax relief claims be presented in very simple terms, which can be difficult when explaining the hugely technical details of a company’s project. In fact, the key to the process is having an understanding of the technology – not just finance - which is why we employ scientists and engineers as well as accountants. The focus should be on the problems encountered during product development. It’s also important to know what questions to ask. They should be technical in nature and framed around the intricacies of HMRC’s guidelines, with answers presented in a language that HMRC understands and which meets their criteria. This can be difficult to get right. We find the best way is to create the report in conjunction with key staff, with a comprehensive financial schedule that allows HMRC to see exactly how the total claimed is broken down and justified.
Making technical people aware of the specifics of HMRC’s guidelines can help them to provide the best possible information to support their claim. In my experience, this approach has also helped to uncover potentially eligible projects that might not otherwise have been considered for R&D tax relief.
Ultimately, it’s the advancements in technology that keep the UK at the forefront of the digital world. The rewards of R&D tax relief which allow companies to re-invest in research will be a crucial factor in maintaining the UK’s position in the challenging times ahead. The support is out there, but companies need to be aware of what they are entitled to and how to access these important and well-deserved benefits.
Garry Keith, Business Development Manager, Jumpstart (opens in new tab)
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