Is the UK’s tech sector missing out on R&D tax relief?
We continue our series on R&D Tax relief with an article from our guest author,Mark Westwood of Jumpstart. He asks the question "Is the UK’s tech sector missing out on R&D tax relief?"
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".
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.
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.
Given these statistics, it’s hardly surprising that the digital industry is considered a major force in the nation’s economy. With all the political and economic uncertainty since the triggering of Article 50 and the general election result, it’s more important than ever 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 relief they are entitled to.
Why don’t more companies claim?
HMRC’s latest statistics show that there were over 26,255 R&D tax relief claims made in 2016, 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 6,650 of claims across the UK.
The most recent Tech Nation 2017 report highlights that in the UK, digital tech businesses are being created twice as fast as non-digital businesses. In London, a new tech business is born every hour! So, why aren’t more companies taking advantage of R&D tax relief?
It’s certainly not a lack of incentive: as from May 2017, 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 or labs.
What kind of projects qualify?
To use a software example, if a company has developed a new software product or process and there have been technical 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’.
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 eligible for relief include:
- staff and subcontractor costs
- materials and consumables
- software licences
There are different schemes for SMEs and large companies. Companies claiming under the SME scheme can receive between 24.7p and 33.35p of tax benefit for every £1 they spend on eligible R&D, while those claiming under the RDEC scheme will receive up to 8.9p for every pound of qualifying spend.
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 to prepare and submit a claim. HMRC requires that the technical reports for R&D tax relief claims be presented in very clear and simple terms, which can be difficult when explaining the complex technical details of an R&D 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.
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 our 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.
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"Is the UK’s tech sector missing out on R&D tax relief?" First published on Company Connecting June 2018