Updated HMRC guidance on claiming Research and Development (R&D) Tax Relief for software and IT projects highlights the importance of considering the availability of R&D Tax Relief at the start of a project.
For companies operating in the technology sector, R&D Tax Relief can be one of the most valuable reliefs available. At current rates, a company that is a ‘small or medium-sized enterprise’ (SME) can qualify for tax relief at 230% of the qualifying revenue expenditure incurred in the relevant accounting period. Loss-making SMEs also have the option of surrendering some or all of the loss relating to qualifying R&D expenditure to HMRC in return for a R&D Tax Credit.
Larger companies that do not qualify as SMEs and also those SMEs that have been subcontracted to perform R&D, by either a large or international company, or who have received grant funding for their own project may instead be able to claim a R&D Expenditure Credit (RDEC), given ‘above the line’. This means that, instead of a super-deduction, a taxable credit is recognised as an additional “income” (currently at 12% of qualifying R&D expenditure), which is then set against certain tax liabilities of the company (in a prescribed order), with any remaining net credit being repaid to the company.
One of the trickier aspects of claiming the relief has always been identifying (and evidencing) qualifying R&D expenditure. The expenditure must relate to “research and development”, as defined by reference to the relevant accounting standards, subject to modifications set out in R&D guidelines maintained on the Department for Business, Energy and Industrial Strategy (BEIS) website.
For expenditure on a given project to qualify for R&D Tax Relief, it is a prerequisite that the project represents an advance in science or technology and that the activities to which the expenditure relates contribute to such advance through the resolution of scientific or technological uncertainty. In addition, there are detailed rules on the types of R&D expenditure that can qualify (such as, among other things, the cost of qualifying staff involved, agency workers engaged, consumable stores used and software licence fees).
With regard to demonstrating eligible activity for software and Information Technology projects, HMRC has recently published updated guidance, including some case studies which aim to show how companies might consider whether they are eligible for making a claim. The case studies (which are available here) are intended to be examples of how similar companies might identify the boundaries of R&D.
Relevant points which feature in the case studies include the following:
- Are the relevant R&D activities part of a wider project and, if so, where are the boundaries between R&D and other activities?
- What technological advance is the project seeking to achieve / what technological uncertainty is the project seeking to resolve?
- Will there be an overall advance in technology (and not merely an extension to the relevant company’s own knowledge)?
- Is an approach to resolving the relevant technological uncertainty already known and publicly available or “readily deducible (as judged by a competent professional working in the field), in which case R&D Tax Relief would not be available?
- At what point will the relevant technological uncertainty be considered to have been “resolved”, so that subsequent activities would no longer qualify?
It is clear from the case studies that the devil is in the detail and that companies intending to claim will do well to consider at the start of a project to what extent expenditure will be “qualifying R&D expenditure”, and to identify ‘grey zones’ and potential difficulties at that point. This will allow work streams to be structured so as to facilitate demonstrating that relevant qualifying activities have been performed.
Please note that this information is of a general nature and should not be considered or relied on as legal or tax advice. If you have any specific questions concerning this development or any other aspects of R&D Tax Relief, please reach out to a member of the Jurit LLP tax team (e-mail: firstname.lastname@example.org or dial 020 7846 2370) or to Simon Bulteel at Cooden Tax Consulting (e-mail email@example.com or dial 01424 225345), quoting Business Edge Magazine).