How new guidelines could affect your R&D tax relief claim

Although the UK government is fully committed to rewarding innovation through incentives such as R&D tax relief, HMRC have recently updated their guidance for technology companies and appear to have drawn a tighter line on what constitutes qualifying R&D projects for the purpose of claiming this generous relief.

Although the updated guidance is specific to technology companies developing new software, parallels will need to be drawn with other sectors that commonly claim this relief, manufacturing being the biggest . The new guidance may well have been missed by many companies and their advisers and has added complexity to what is already a specialist area of tax. 

The update appears to be a response to the increasing number of R&D claims being submitted and could be seen as a soft attempt at increasing compliance of the rules in what is, after all, a self-assessment regime.

So what does the updated guidance mean?

The test remains that for a R&D project to qualify there must be an overall advance or appreciable improvement in science or technology through the resolution of scientific or technological uncertainty, that is not readily deducible to a competent professional working in that field of science or technology. This test applies across all sectors.

For technology and software claims the new guidance goes on to say that software, as with all information technology, is continually changing and developing with a number of well-established branches of software that continue to evolve (e.g. artificial intelligence, cloud or mobile computing), as well as new applications for software being developed (e.g. software robots, augmented reality and internet of things, and others yet to come). The guidance has been updated to reflect changes in technology. The words ‘research and development’ are frequently used in the software sector and care should be taken not to assume that a commercial project fully aligns with the definition of R&D set out in the guidelines.

There are two ways in which expenditure on the creation of software can be R&D:

• Where software is created or adapted solely as a tool for direct use in a larger R&D project or;
• Where software is developed as the goal of the R&D project

While the project has always had to aim to advance or appreciably improve science or technology, software/IT projects will now also need to be measured against the baseline in technology at the start of the project. The gap in technological knowledge that necessitated an R&D project and the changes needed to extend the baseline knowledge which require non-readily deducible methodology to resolve the technical uncertainties that the project faced.

Already sounding complicated?   

HMRC are also expecting businesses to identify the R&D project boundaries and the guidelines highlight that for most projects  the development of a commercial product will go further than resolving technological uncertainties and so will not qualify as R&D in their entirety.  Therefore it is important to identify the R&D projects within the commercial project that do qualify as R&D. In December 2018 they went on to issue a further paper that contained four case studies that highlight development projects with a number of scenarios that do or don’t qualify – this can be found here.

While this is useful information, the added layer of complexity is likely to put off many companies and their advisors from claiming if they aware of this latest stance. It could be seen as contradictory to the government’s pledges to drive innovation forward and reward those companies who are prepared to take a risk.

Despite all of this, can you afford to miss out on this valuable and generous relief? For a profit-making company, R&D relief is available at nearly 25% of the amount spent on R&D and can make a sizeable reduction to your Corporation tax bill.  If a company is loss making the relief can be worth as much as 33% of the R&D spend and awarded by ways of a payable tax credit from HMRC.

Why not test your eligibility to claim, by downloading our simple 10 eligibility checklists?  Ten minutes of your time and a handfull of simple to answer questions should help determine your eligibility to claim.

For more details, speak to our Radius team;

• Sheffield, East Midlands, and Barnsley & Rotherham Chambers of Commerce's R&D tax relief partners
• sponsors of Sheffield Digital and the Manufacturing Forum
• includes an ex-HMRC R&D Tax Inspector
• apply a simple three stage process which quickly identifies whether you have qualifying projects and helps to prepare and submit a robust claim to HMRC
• includes members of HMRC’s Research & Development Consultative Committee which helps us stay up to date with any changes in guidelines and thinking
• have a 100% sucess rate with all R&D Tax relief claims submitted - have never had a claim rejected

Visit some of our video case studies for clients using our Radius service;

• Rollem Patent Products
• Abbeydale Brewery
• Penny Hydraulics

Don’t forget that there is a two-year window to claim this relief so any company with a year-end coming up needs to be aware that time is running out to submit a claim falling within the last two years.