Busting the R&D tax relief myths in the IT sector
In 2000, the government introduced a scheme for SMEs to encourage scientific and technological advances. In 2002, they rolled this out for larger companies.
Research and Development (R&D) tax credits are an incentive to reward companies engaged in innovation — giving them the opportunity to claim back a proportion of their R&D expenditure as tax credits, which can reduce their tax bill or increase taxable losses.
If you’re an IT business, particularly one involved in software development, you could reap the benefits of R&D tax credits — with an SME average claim value of £54,000, which could be used to invest in further innovation, creativity and growth.
So why are so many businesses in this sector still missing out?
Myth 1: “R&D tax relief isn’t for companies in the IT sector”
You may think that research and development only applies to people in white coats experimenting in laboratories, but that’s where you’d be wrong. In fact, any innovating business, including those in the IT sector, could be eligible for R&D tax relief.
As the world changes at a faster pace than ever, innovations are happening continually across all industry sectors. This is particularly true of software development, which rests upon constant innovation, and which is in the top 5 sectors currently making claims, according to the HMRC.
And just as these companies are moving with the times, so is the HMRC, who have recently updated and broadened their guidance on software claims to include AI (Automated Intelligence), AR (Augmented Reality), Cloud & Mobile, IOT (Internet of Things) and software robots.
Myth 2: “R&D tax relief is only available if you’re creating something brand new”
In the IT sector, developments to existing products, processes and systems happen every day. So even if you’re not creating an entirely new product or piece of software, any additions or improvements still count as R&D — and could mean you’re eligible to claim.
The new HMRC regulations state that even if a company develops software with a similar function to one that already exists, they may still be eligible to claim R&D tax credits. This is because the technical challenges may be different in each case. In other words, what matters is not what is produced, but how.
Take this real-life example from the HMRC guidelines:
‘A [computer games] company realised that each object on a game’s screen had to be programmed in respect of its interaction with all the other objects. As the game became more complex, more objects were introduced, and the amount of code required rose exponentially. The solution was to program the properties of each object […] The qualifying expenditure on developing this innovative code qualified for R&D relief’.
Myth 3 “If you use subcontractors, you aren’t eligible for R&D tax relief”
In short, if you’ve paid an external party to carry out R&D for your project then it could qualify for R&D tax credits. If you’re an SME that subcontracts R&D activities, you could claim tax relief on up to 65% of the associated cost.
This still applies even if the subcontractor isn’t a UK resident. And the R&D work doesn’t have to be UK-based.
Subcontracting is an issue that can cause confusion, and the HMRC cites it as one of the main causes for error in R&D claims. But this shouldn’t hold you back. At MPA, our experts can help you work through the process of claiming R&D tax relief on subcontractor costs, to ensure the best chances of success.
Myth 4 “R&D tax relief is only available for successful projects”
The good news is that you could still be eligible to claim R&D tax credits even if your innovation wasn’t successful, made a loss, or has become redundant.
What matters most to HMRC is that the project represents an advance at the time of development.
So, for example, IT companies are regularly developing new encryption and security techniques which often lead to further advances. But even if this renders the original innovation redundant, it’s likely that it’ll still qualify for R&D tax credits.
From busting myths to making-it-happen
Now we approach the final hurdle when it comes to claiming R&D tax relief. Many IT companies know they could be eligible, but the complicated application process stops them from going ahead with their claim.
This is where MPA comes in. With over 12 years’ experience in this field, we can minimise your stress and maximise your entitlement when applying for R&D tax relief.
We believe the first step to a successful application is working with an expert who knows your industry inside out. So, we’ll always match you with the analysts whose background and expertise fits yours and knows what’s best for your IT business.
Most importantly, we can help release the finances you need to fund your next great idea. Which releases you to do what you do best: innovate.
To find out more about how we can help, speak to one of our advisors today.Get in touch