R&D tax credits are a vital source of cash for tech businesses, and never more so than in these challenging times.
Profits may be down and R&D budgets trimmed as companies battle to get through the pandemic, but thoughts are slowly turning to the future and how competitive advantage can be gained (or regained) through innovation.
Reducing R&D expenditure will have a knock-on effect in terms of R&D tax credit claims in 2021, so it is imperative that future claims are optimised whilst remaining fully compliant.
Historically software related claims have been seen as fairly easy to make a claim for and many companies have basically submitted the same claim year on year, claiming for most, if not all, of their technical department’s costs.
However, in the last couple of years, there have been a number of changes to the R&D tax credit scheme, the most significant of which was a document issued in October 2018 called CIRD81980 - Case Studies demonstrating R&D tax credit claims for software projects.
The primary goal of the document is to define boundaries, particularly those detailing what qualifies for R&D, and what doesn’t.
HMRC defines R&D as taking place “when a project seeks to achieve an advance in overall knowledge of capability in a field of science or technology.” They later go on to say that this focuses on “projects and activities that help resolve scientific or technological uncertainties.”
The guide defines an R&D project as starting when it begins work to resolve uncertainty, and ends when that uncertainty is either resolved, or found to be unresolvable. It is these boundaries that are often the hardest part of any software claim to explain properly to HMRC in a technical narrative.
The advance needs to be an advance in overall knowledge in software technology, not merely an advance in a company’s own knowledge alone, except only when the details of such advance are not publically available due to the intellectual property being owned by another company.
As it stands, it means that credits cannot be applied to routine analysis or work that has commercial considerations. However, many software businesses are finding that the number of challenges issued by HMRC are increasing, making the counselling of external R&D tax credit experts all the more important.
WHAT KIND OF PROJECTS QUALIFY?
Some common examples of software projects that might qualify for R&D tax relief include:
- Integration of software and hardware platforms.
- Software that enables new computer hardware.
- New methods of capturing, utilising or communicating data.
- Improvements to programming language.
- Methods that extend the functionality of software or an operating system.
- Software development tools.
DIFFICULTIES SURROUNDING R&D CLAIMS
Many companies have found it difficult to determine when R&D begins and when it finishes. There is also confusion when it comes to differentiating between commercial projects and R&D, and differentiating between which parts of a software project are claimable and which parts are not.
In order to combat these issues, HMRC published CIRD81980, containing a number of case studies that showed where the boundaries in software claims are, what costs can be claimed and what costs can’t.
All these influences have led to R&D software claims becoming rather nuanced processes. Here’s an example of what we mean:
It may be obvious that marketing costs or implementation bug-fixing costs are not claimable, but there is a category of costs called qualified indirect activity that can be included in a claim.
Say you’re building a test harness for a new piece of software algorithm: the algorithm itself may have been an attempt to solve technical uncertainty, but it can’t be tested without the test harness. Hence the harness creation costs will qualify as indirect activity whereas the algorithm qualifies directly, meaning that although they’re both working towards solving technical uncertainty, they satisfy different criteria in different ways.
It’s clear from the examples contained within CIRD81980 that documenting and qualifying a software claim is by no means a quick and simple process. Getting the maximum amount out of a claim while satisfying all of the required criteria needs experienced and skilled specialists.
The problem in the market currently is that many companies are receiving bad advice from so-called external ‘specialists’ who work on the basis that a huge number of claims are processed by HMRC without any level of scrutiny. Poor quality claims often get processed that a reputable firm would not consider proceeding with.
However, assuming that if HMRC has paid out on a claim, the claim is accepted, is a very dangerous assumption. HMRC has powers to open an enquiry into a return up to 12 months after the statutory filing date. Even if the tax credit has been paid, it may be subsequently challenged – and clawed back.
HMRC challenges can be a difficult and lengthy process; introducing a competent professional to carry out the exchange can therefore help to navigate the complexities of making a claim and save a considerable amount of time.
MSC R&D are fortunate enough to have a low challenge rate with the claims we work on. This is due to the fact that we employ many former HMRC employees and specialists who understand how to properly interact with and satisfy one of the largest financial institutions in the country. This includes Gavin Bate, who wrote the rule book during his time at HMRC.
If you want to be certain that you’re claiming for all the eligible parts of your R&D spend and that you’re staying within the boundaries outlined by HMRC, talk to us on 0114 230 8401 or email email@example.com