Identifying qualifying R&D in the field of software development

This post is part of our Entrepreneurial team’s regular series of blogs.

The number of Research and Development (R&D) Tax Relief claims made in the computer science and information technology industries has rapidly increased in recent years. With that, HMRC have invested time and resources into educating their inspectors to identify qualifying and non-qualifying activities within software development claims. This is because, although the Business Energy and Industrial Strategy (BEIS) guidelines (that define the qualifying criteria for R&D tax relief) apply equally to all fields of science and technology, HMRC recognised that there had been difficulties in the past in applying them to some software projects and therefore determining whether they were eligible for relief.

As well as training their staff internally, HMRC published guidance for claimant companies to assist them when preparing claims, to accurately capture only qualifying activities and costs. A summary of the key points are as follows:

Advancing knowledge or capability in the entire field

The advance or appreciable improvement being sought needs to advance the knowledge or capability across the whole field of computer sciences and information technology, rather than the company’s own knowledge or capability. Whether the advance applies to the entire industry or only the company can sometimes be hard to ascertain in a fast-moving industry such as computer sciences. This should be considered by a competent professional working in the field and by reference to publicly available information.

Focus on the underlying technology

The technological advance being sought should focus on the underlying technology being developed i.e. the algorithms and methodology, rather than the commercial output of the software. This is because software can be developed to provide functionality that is novel, however the methodology applied to achieve this is routine, and therefore non-qualifying.

How to identify technological uncertainties

As with all other industries, the claimant company must also face technological uncertainties when seeking to achieve the advance. Technological uncertainties arise when how to achieve the aim it is not readily deductible by a competent professional or by applying existing methodology. Examples of technological uncertainties that HMRC provide include:

  • Developing new or improved data architectures that cannot be achieved with readily deducible solutions, e.g. pushing beyond the boundaries of existing readily available database engines.
  • Extending software frameworks beyond their original design, where knowledge how to extend these was not available or readily deducible at the time.
  • System uncertainty when working with multiple components, resulting from the complexity of the entire system, rather than how the individual components behave, i.e. components cannot be assembled into an established pattern.

Separate the R&D project from the commercial project

R&D projects must be carefully defined within the larger commercial project. Any activities that do not attempt to overcome technological uncertainties do not qualify for relief and fall out-with the project for tax relief purposes. Specific activities that HMRC state do not qualify for R&D tax relief include:

  • Planning activities associated with non-R&D elements of the project such as financial, marketing and legal aspects.
  • Development of routine aspects of the software, such as the user interface, rather than the underlying technology.
  • Testing only qualifies if the purpose of the testing work is to feed back into the development, not to validate that it works properly once the technological uncertainties have been resolved.
  • Deployment or release activities that transfer software to production systems generally happen after the uncertainty is resolved and, as such, do not qualify.
  • Maintenance activities or minor fault fixing where no technological uncertainties arise do not qualify.

HMRC are increasing resources in their R&D team and diverting and re-training staff from other areas to enable them to process and accurately analyse the eligibility of claims. Therefore, it is important that companies consider and adhere to the above guidance when making software development claims.

Here at C+T we have extensive experience in preparing R&D claims in the computer sciences sector and our report to support a claim is designed to give HMRC all of the information it requires to assess its eligibility and prevent an enquiry being opened to request more details.

Our team of experts are on hand to help you through the claim process, give you peace of mind that all relevant factors have been considered, and significantly reduce the risk of an enquiry. If you have any questions, get in touch and we can advise.

If you would like further advice regarding the availability of Research & Development Tax Relief relief, please get in touch with us.

Welcome to our Research & Development week!

This week we will focus on the work of our Research & Development Tax team, highlighting the work they do for clients; sharing hints, tips and advice on how to utilise R&D Tax relief; and hearing directly from clients themselves on how they have found working with us.

One of the most generous corporation tax reliefs currently available, R&D Tax relief is designed to encourage innovation and increase spending on R&D activities. You can claim back money that you spend on research and development to offset against current or future tax bills.

The team are tax experts first and foremost, and combine inside-out knowledge of R&D with a deep understanding of the wider corporate tax position. Dealing with over a hundred claims a year, we understand HMRC’s language and can advise on the impact a relief claim will have on your tax position, compliance and strategy.

If you are thinking of making a claim for R&D Tax Relief, or not sure if you would qualify, contact David and our team of experts today.

Research & Development Tax Relief: ways to maximise your claim

Our team of full-time Research & Development (R&D) Tax Relief specialists has highlighted the key areas where there are opportunities to maximise your R&D claim that can be commonly missed:

 

Grant funding

Companies often incorrectly believe that receiving grant funding means that they are not eligible to claim R&D tax relief. This is not the case; the receipt of a grant can, however, impact upon the level of relief a company is entitled to claim.

Depending on the type of grant received it can cause some or all of the qualifying project expenditure to be ineligible under the R&D SME scheme, potentially for the entire life of the project. A specialist R&D advisor will be able to apply the detailed legislation to each of your projects to ensure you claim the maximum amount of relief you are entitled to.

An experienced advisor will also be able to help you to proactively maximise your R&D claim in relation to grant funding. If you are considering applying for a grant, our team can guide you on how to structure your application to ensure that it does not adversely impact upon your R&D claim.

Customer contracts

There is also a misconception that when a company has been approached by a customer to undertake R&D that these activities are not eligible for relief. In fact, depending on the factors specific to each engagement you may still be eligible for relief. Our specialist R&D team can review customer contracts to determine if a claim is eligible and we can also proactively review contracts to ensure any new projects are eligible.

Investments

A claimant company is required to include the accounting data of other entities if they are considered to be ‘linked’ or ‘partner’ enterprises. Aggregating this data can cause a company to breach the SME thresholds for R&D purposes, making the company ineligible for relief at the preferred rate.

This is something that should be considered when carrying out an investment round. Our R&D team can advise whether a proposed investment will breach any of these limits.

Dividends

It is common for directors to take dividends, rather than putting themselves on the payroll, to avoid paying money through the PAYE scheme that could otherwise be invested back into the business. However, dividends are not a qualifying cost for R&D tax relief purposes and, as such, cannot be included in a claim.

As employees’ and directors’ gross salaries are a qualifying cost, it may be worth considering adding any directors to the payroll and paying them below the personal allowance and national insurance thresholds, so no PAYE or NIC are payable, and pay any further remuneration as dividends.

Staff versus Freelancers

In the early stages, many companies will outsource work to specialists or utilise subcontractors and agency workers. For SME claims, costs spent on engaging with subcontractors and agency workers will be restricted to 65%. Furthermore, if you are claiming under the RDEC scheme, there are multiple restrictions on third party costs – as well as a payable PAYE/NIC cap. This means you may not be able to claim any of the costs incurred.

Third party costs

Subcontractor and externally provided worker costs, in most cases, require a statutory restriction of 65% to be applied. However, if a third party is considered to be ‘connected’ to the claimant company or if an election to be treated as connected is made, relief for 100% of the costs can claimed.

Here at Chiene + Tait, our R&D specialists have years of experience preparing and submitting successful claims for hundreds of companies, across both R&D schemes (RDEC and SME), in multiple industries.

If you are considering claiming relief and would like to hear how we can help you, please email us at RDtax@chiene.co.uk.

 

How can R&D tax relief help cashflow during the recession?

In this blog, Eilidh Hobbs in our Research & Development Tax Relief team highlights how the relief can provide a lifeline for qualifying businesses during the current recession.

Most, if not all, businesses have been affected in some way by Covid-19. Some have been lucky enough to see a surge in demand due to the nature of their business, but unfortunately many have been negatively impacted. This meant that management have had to move their focus away from long-term strategy, to managing day-to-day cashflow.

HMRC have introduced a number of temporary schemes and incentives specifically to support companies through the unprecedented pandemic. However, there are other permanent schemes that can also help businesses through these trying times, such as R&D tax relief.

Many companies are carrying out qualifying R&D activities but have not considered claiming tax relief in the mistaken belief that they don’t fit the conventional image portrayed of a pure R&D company.

HMRC’s definition of R&D applies to all industries and as long as your business seeks to achieve an advance in a field or science or technology, and in doing so is required to overcome scientific or technological uncertainties, you will qualify for the relief. The definition is wider than you would think. Chiene + Tait’s dedicated R&D specialists are happy to discuss any projects your business has undertaken to assess whether you may be eligible to claim the relief.

A claim can result in a generous cash tax credit, or a reduction to tax liabilities and you have two years from the company’s financial year end to make a claim – so you can benefit from activities and R&D investment in prior periods; up to three years prior. The benefit may also be with you quicker than you would expect as HMRC are currently aiming to process SME claims within 28 working days.

If you have a query about Research & Development Tax Relief, or wonder if your company can apply, contact Eilidh today on 0131 558 5800 or email eilidh.hobbs@chiene.co.uk.

How COVID-19 reliefs impact Research & Development Tax claims

The Chiene + Tait team has been inundated with queries regarding the various new COVID-19 reliefs that are available for businesses. Whilst cash has always been ‘king’ for businesses, there has never been a more important time to have sufficient reserves.

Research & Development (R&D) Tax Relief has been the ‘go-to’ cash relief for innovative companies since 2002. There are complexities as to how R&D Tax is interlinked with the new COVID-19 reliefs, which should be considered before diving into making claims for the various reliefs available. Below are a few frequently asked questions we have received from clients in relation to the reliefs:

Should I claim under the Coronavirus Business Interruption Loan Scheme (CBILS)?

Yes, but watch out for traps. EU regulations require that no project, as opposed to no company, can receive more than one notified State Aid. As the SME R&D Tax scheme and the CBILS have both been notified as State Aids, there could be an issue regarding allocation of costs, particularly if the CBILS relates specifically to R&D expenditure, rather than being used more generally to support the company as it is intended. It is vital to watch out for this when drafting CBILS applications. If it is not an option split out the costs, all isn’t lost. An R&D claim would still be able to be made under the RDEC scheme, albeit at a lower level of relief.

Should I use a COVID-specific grant to fund my R&D project?

Since the start of the pandemic, we have seen a significant increase in the number of grants available for R&D projects. In some instances, these grants are deemed to be notified State Aid, meaning that the full R&D project would be ineligible under the SME scheme. A claim can, thereafter, only be made under the less-beneficial RDEC scheme. It is worth noting that, once a project is ineligible for the SME scheme, that’s it. The project would continue to be ineligible for the entire length of the project. It’s therefore important not to just think about the cash benefit this year, but also years 2 and 3.

Where a grant isn’t notified, it will likely be de minimis. Receiving de-minimis aid will still impact your R&D claim but not to the same extent as if you received notified State Aid. All costs subsidised would be ineligible under the SME scheme, however, an SME claim can still be made for the costs not covered by the grant. This essentially means that 2 claims can be made, one under the SME scheme for the non-subsidised costs, while a RDEC claim can be made for the subsidised costs.

It’s not always obvious how a grant should be treated, and it is an area where the devil is very much in the detail. Make sure that you seek advice so that you don’t accidently limit the cash relief available.

What happens if I furlough staff?

When an employee is furloughed, they will not be carrying out any work; therefore, they will not be directly and actively engaged in R&D activities. This will likely impact next year’s claim rather than any immediate claim for obvious reasons, however, it is something to consider. This will not affect your ability to claim eligible projects, once the employee has returned, the R&D project can re-start.

During the pandemic, it is vital that you claim for all relief that you are eligible for. If you have a query about what your business can claim contact our team today at covid@chiene.co.uk.

COVID-19 Pivotal Enterprise Resilience Fund Reopens but with strings attached

Breaking news – the Scottish Government has announced that they plan to reopen the Pivotal Enterprise Resilience Fund next week (w/c 11th May, final details to follow) after they were inundated with applications over the first weekend of applications. The pot will swell by another £45m (£90m allocated to the fund in total) for businesses that meet the criteria but be aware – you may have an issue claiming from the Fund if you have received other ‘state aid’ such as Research & Development Tax Relief. More information will be shared by the C+T team when confirmed.

R&D Tax credits and Grants – how to maximise relief

Grants are an essential tool for growing a business, but did you know that by receiving a grant, it could restrict your company’s ability to claim further Research & Development (R&D) tax reliefs and incentives? In this article, Dave Philp Chiene + Tait’s Head of Research & Development Tax outlines the implications of receiving a grant and its impact on eligibility to receive R&D Tax Relief. Background reading on R&D Tax Relief, and its associated schemes (the SME and RDEC schemes) can be found in a previous article by Dave here.

There is a myth that, if a company receives a grant, it cannot claim R&D Tax relief. Whilst this is untrue, receiving a grant can throw a spanner in the works.

In a bid to guarantee a level playing field for European businesses, the European Commission restricts one Notified State Aid per project. That means if the company has already received Notified State Aid for a project, that project will not qualify under the R&D SME scheme. Any projects that have been in receipt of Notified State Aid will instead fall into the less beneficial RDEC scheme, where companies can claim 10p to the pound, rather than 33p.

Unfortunately, it is not possible to repay the Notified State Aid. Once received, the project is automatically excluded from claiming R&D tax relief under the SME scheme for the entire length of the project.

There are, however, some things that you can do to avoid any potential pitfalls. By following the tips below, it is possible to maximise your claim by combining both grants and R&D tax relief:

Know what type of grant you are applying for – firstly, not all grants are classed as Notified State Aid. As such, not all grants will qualify you for the less advantageous RDEC scheme. De-Minimis Aid, which offers up to €200,000 worth of funding, is not classed as Notified State Aid and will therefore not force the project into the RDEC scheme. In this instance, it is possible to split relief over the two schemes: subsidised expenditure will fall under the RDEC scheme, whilst the remaining unfunded expenditure will remain qualifying under the SME scheme.

Determine what project the grant relates to – the rules apply on a project-by-project basis, not on the total R&D work undertaken in the year. If you have received Notified State Aid in relation to one project, this does not affect your ability to claim under the SME scheme for any remaining projects. Likewise, if you have received Notified State Aid in relation to non-R&D activities, this will not affect your SME claim.

Look at the long-term implications – remember, once you have received Notified State Aid in relation to a project, that’s it: there is no way back. Try to consider the long-term implication of receiving the grant and how it will affect future claims. Taking a small £10,000 grant at the early stages of a R&D project may help cashflow in the short-term, however this could also affect the ability to claim R&D tax relief in future years.

Speak to people who know R&D tax relief – R&D tax relief is an ever-changing, complex area of legislation and it really does pay to speak to an expert to ensure that you are maximising your claim, whilst also planning ahead to avoid any potential pitfalls.  A quick chat at the beginning of a project can provide you with a clear and proactive action plan, leaving you with more time to run your business!

If you have any queries about R&D tax relief, Notified State Aid or De-Minimis State Aid related to investment, contact Dave Philp today at entrepreneur@chiene.co.uk.

Business must prepare for R&D tax relief crackdown

In this blog, Dave Philp Head of R&D at Chiene + Tait outlines the implications of a potential clampdown on spurious research and development claims to HMRC.

R&D (Research and Development) Tax Relief, introduced in 2000 to encourage more company investment into innovation, is more popular than ever. In 2017-18, UK companies submitted over 48,000 claims for R&D tax credits. A total of £4.3bn in tax relief was secured, an increase of £1bn from the previous year. Here in Scotland, £175m in R&D tax relief was secured by businesses in 2017-18. While this rise in claims is positive, suggesting more UK businesses are focusing on innovation as a way to make themselves competitive, there are also concerns about illegitimate claims being submitted.

HMRC is now taking steps to combat fraudulent claims, reporting that it has already identified and prevented half a billion pounds of fraud linked to R&D tax credits. Last year the Government announced it would re-introduce the PAYE and NIC cap on SME payable credits, a move aimed at preventing fraud within structures set up to claim a tax credit despite there being no evidence of UK-based innovation activity or job creation.

Following the internal re-structuring of HMRC’s R&D tax teams last Autumn, it was also announced in the Queen’s speech that the Government would create a single, beefed-up, anti-tax evasion unit to cover all taxes and introduce new anti-avoidance measures. This potential forthcoming clampdown on R&D tax credit abuse in the UK follows a similar process carried out in Australia in 2018 which sent shockwaves through that country’s software sector. The Australian Government’s crackdown had significant impact with companies, including the tech firm Airtasker, being ordered to pay back millions of dollars they had received in R&D tax breaks.

While a number of businesses there were caught on the hop, the Australian Tax Office had made clear a year earlier of their intention to review R&D claims from software companies. This came amid concerns that advisory firms were encouraging companies to claim for work, which didn’t count as pure R&D. Despite the British Government getting set to impose greater scrutiny here, its support for R&D tax credits is unlikely to dissipate, especially with the UK having just completed its withdrawal of the EU.

Indeed, the new Boris Johnson-led administration has stated that it will review the definition of R&D, mainly to further incentivise cloud computing and data projects. It has also announced it will increase the R&D Expenditure Credit available for large companies and grant-funded projects. Potential abuse of R&D tax relief claims is, however, likely to be subject to much closer scrutiny going forward. To assist this process, one of the areas that the Government should be focused on is tougher regulation for those who advise companies on R&D tax relief.

Whilst there are a number of good, tax focused, R&D advisors operating within the UK, there are also a number of ‘experts’ who resort to cold-calling and wrongly advising that a company can easily qualify for relief. HMRC can take their time opening enquiries into a company’s tax affairs and any erroneous claim will be required to be repaid, along with potential penalties and interest. It will also likely be a red mark in any due diligence process, should it wish to be sold in future.

While other business advisory professionals, such as accountants and lawyers, must rightly conform to regulation and governance from their respective industry bodies, there is currently no such body to regulate R&D specialists. New regulation in this area would help to ensure companies are not put in risk at making an illegitimate claim.

Time will tell if the UK’s R&D tax credit crackdown will prove to be as harsh as what occurred in Australia.  There is, however, no doubt that companies need to consider whether they meet HMRC’s definitions as set out in the tax legislation and guidance with sufficient back up to support their claim. For those companies that are unsure of this process it is important they work with a credible and established adviser, ideally one that is currently governed by an industry code of conduct.

Are you missing out on Research & Development Tax Relief?

In this blog, David in the Chiene + Tait Entrepreneurial Tax Team highlights Research & Development Tax Relief and asks – are you missing out?

Scottish companies received over £165 million in Research & Development (R&D) tax credits last year. Yet a recent HMRC study showed a number of industries are still failing to claim R&D tax relief, when they could be eligible. I’ve produced an infographic on which sectors can claim the relief but traditionally don’t here.

There is a misconception that the relief is only available for technology start-ups or scientists in lab coats. This is just simply not the case, so is your company missing out?

What is Research & Development Tax Relief?

Research & Development tax relief is one of the most generous corporation tax relief currently available. The relief is a HMRC incentive designed to encourage innovation and increase spending on R&D activities, however, many companies incorrectly believe that they don’t qualify.

The relief can be extremely beneficial. Under the scheme companies can receive a tax credit or enhanced deductions to reduce their tax bill, that means £100k worth of qualifying expenditure can get you either:

  • £230k worth of losses (worth £44k @ 19% tax rate) to utilise against future profits or
  • £33.35k tax credit (cash in hand)

Essentially this means that if your company has tax to pay, you will pay less. If not, the Company will receive a tax credit.

What is R&D?

In the eyes of HMRC, R&D is a project that seeks an advance in science or technology through the resolution of scientific or technological uncertainties.

An advance in science or technology is an advance in the overall knowledge or capability in a field of science or technology (not a company’s own state of knowledge or capability alone). This can also include a project that seeks to make an appreciable improvement to an existing process. In layman’s terms, if you are seeking to create something new or improve upon an existing process, it will likely qualify for the relief.

Even if the advance in science or technology sought by the project is not achieved, R&D still takes place. This means that costs relating to aborting a project could also qualify for R&D.

Available for all – not just people in lab coats

With such a broad definition, thousands of companies are missing out. Below are just a few examples of projects that have qualified for relief in the last year:

  • Creating a new recipe for a soft drink to adhere to the new sugar content regulations
  • Improving upon an existing manufacturing process
  • Creating a bespoke multi-functional piece of furniture
  • Building a software infrastructure that’s more efficient than its competitors
  • Developing an in-house Customer Relationship Management system

None of these are ’traditional’ R&D projects but all qualified for R&D tax relief. Some tips to keep in mind when considering if your project will qualify is to ask yourself the following:

  • Has a technological advancement been made?
  • Is the company working on something that has never before been attempted?
  • Has the company tried to improve their existing products through technological change?
  • Has the company found a more efficient way to work?

If your answer is yes to any of these then there will likely be scope for an R&D claim. Your next step should be to speak to an R&D specialist to determine the size of the claim and to ensure that you don’t suffer any pitfalls!

Chiene + Tait has a specialist R&D team that can help identify what can and cannot qualify for relief. In the past 24 months, we have successfully submitted over 80 R&D tax credit claims resulting in over £2.5 million being received by our clients, achieving a 100% success rate. If you would like to watch a webinar outlining these points, please visit the Chiene + Tait You Tube channel here.

If you would like a no obligation meeting to discuss R&D Tax Relief and whether you can apply, please contact me at david.philp@chiene.co.uk or call 0131 558 5800. Alternatively, I’ll be at the Investing Women Ambition & Growth Conference on 8th March and happy to chat further.

Kirsty Paton in our Entrepreneurial Tax Team has also written a blog about Understanding Investment. To read this article click here.