.png)
.png)
Relief for Corporation Tax
The Small and Medium-sized Enterprise Scheme
What is this amazing tax deal?
This scheme was introduced some years ago to give extra tax relief for keen entrepreneurs investing in the white heat of technology where stuff needs looking into to find possible solutions, spend a fortune on researching into solutions, find that most of the solutions are wasted money, and then finally launch the one idea that actually works, and solves a problem. This type of expenditure is seen as both high-risk, and ‘to be encouraged’ by those in charge of us.
For example the research that went into the challenge to produce the first workable Fuel Cell for use in vehicles, or the guys who created the next generation of computing commonly described as Artificial Intelligence (AI).
The scheme has great (high) rates of relief. From 1 August 2008, the tax relief on allowable R&D costs was 175 per cent - that is, for each £100 of qualifying costs, your company or organisation could have the income on which Corporation Tax is paid reduced by an additional £75 on top of the £100 spent.
This is a very powerful tax relief, but use of it should be exercised with care. HMRC may challenge claims, and in such cases professional advice should be taken before making any response to HMRC. Remember that if HMRC succeed in defeating a claim there will be no flexibility - they will take away 100% of the tax reduction.
.
.
Example Claim
Taxable Profit (net of R&D £20,000 treated as an expense in accounts) | 100,000 |
|
Corporation Tax @ c.25% |
| 25,000 |
R&D Claim is based on | 20,000 |
|
Uplift | 15,000 |
|
Reduced taxable profit | 85,000 |
|
Revised tax bill |
| 17,000 |
Reduction in tax |
| 3,000 |
So overall tax rate is | 17.% instead of 20% |
|
NB. In this example the costs are being expensed in the accounts due to uncertainty of outcome. If the R&D claim was taken away it is unlikely the underlying expenditure would also be disallowed. It is possible to capitalize R&D, and then expense it over life of finished project. This is attractive as earnings are enhanced, and the tax relief is still obtained.
Which costs qualify for R&D Relief?
Nothing under £10k pa.
To qualify as R&D, any activity must meet the definitions set out by the Department of Trade and Industry (DTI). (This organisation is now known as the Department for Business, Innovation and Skills). These guidelines state that the activity must contribute directly to seeking the advance in science or technology
What is R&D?
The activities that constitute R&D for tax purposes are those activities undertaken which fall to be accounted for as R&D under generally accepted accounting practice BUT/and also fall within the special definitions set out in the DTI Guidelines for activities to be treated either as “directly contributing” to seeking the advance in science or technology, or as “qualifying indirect activity”. The DTI Guidelines specifically exclude certain activities from the scope of R&D for tax purposes,
The advance being sought must constitute an advance in the overall knowledge or capability in a field of science or technology, not a company’s own state of knowledge or capability alone.
Software projects likely to be R&D
* Developing new operating systems or languages.
* Creating new search engines using materially new search methods.
* Resolving conflicts within hardware or software, where the existence of a problem area and the absence of a known solution have been documented.
* Creating new or more efficient algorithms whose improvements depend on previously untried techniques.
· Creating new encryption or security techniques that do not follow established methodologies.
Projects unlikely to involve R&D
Some software applications or components of applications will normally follow established methodologies and not involve scientific or technological uncertainties and so not qualify as R&D, examples are:
* The handling of interactions with users. This covers areas such as development of data entry procedures and user interfaces.
* The visual presentation of information to users.
* Creating software that replicates an established paper procedure, possibly building in best practices. The fact that a previously manual task has been automated does not by itself make it R&D.
* The assembling, carrying out routine operations on, and the presenting of, data.
* Using standard methods of encryption, security verification and data integrity testing.
* Creation of websites or software using tools designed for that purpose.
However where these contribute directly to a larger R&D project they would not be excluded from the larger project.
Successfully assembling an Ikea cupboard in less than a week? Maybe not.
or finally getting your wireless printer to admit your wireless network exists, which took an engineer all day to fix, charging a fortune, is not R&D, even if it feels like a technological breakthrough when the printer finally spits out 485 copies of your shopping list.
More definitions
1) Software that is used as a tool in a larger R&D project
Where software is developed as a tool for direct use in a larger R&D project, then development of the software will qualify as R&D. An example might be data handling software needed to record and monitor the results of the R&D. The software need not of itself involve a specific advance in science or technology - if it directly contributes to a larger R&D project it will qualify as R&D.
2) Development of software as the goal of the R&D project
The following guidance relates to software projects. The guidelines apply to a software project in the same way as they apply in any other project.
· The project must seek to achieve an advance in science or technology.
· The activities that directly contribute to achieving the advance through the resolution of scientific or technological uncertainty are R&D
· There must be an advance in overall knowledge or capability in a field of science or technology, not just the company’s own state of knowledge or capability alone
· The development of a software product does not represent an advance in science or technology simply because it is software
· Routine adaptation of an existing product or process is not R&D
· Assembling components of a program to an established pattern or using routine methods for doing so is not R&D
· Combining standard technologies can be R&D if a competent professional in the field can’t readily deduce how the separate components should be combined to have the intended function
Most software projects will be intended to result in a product to be either used in-house, licensed or sold.
The project may be to produce a product for use in the arts, humanities and social sciences (including economics). Such projects would only qualify as R&D projects to the extent that they are seeking to advance knowledge through the resolution of scientific or technological uncertainty. This is because of the general exclusion of the arts, humanities and social sciences (including economics) in the DTI guidelines on the meaning of R&D.
Software projects and system uncertainty
It may be claimed that there are always system uncertainties involved with software. It is true that there is always some uncertainty about anything. But uncertainties that can be resolved through discussions with peers or through established methods of analysis are routine design uncertainties rather than technological uncertainties. Technical problems that have been overcome in previous projects on similar operating systems, or computer architecture, are not technological uncertainties.
Where the aim of a project goes further than resolving scientific and technological uncertainties the project as a whole will not qualify as R&D, but there may be elements in the project that do qualify as R&D. Most projects for the development of a commercial product will go further than resolving technological uncertainties and so will not qualify as R&D in their entirety.
Procedures
HMRC suddenly noticed this regime was not burdened down by masses of paperwork, so after 49 working parties, and sham consultations, they have introduced FORMS, and what do they mean....bureaucracy, so job done.
Now there are two separate forms to be filed – one notifying that you are claiming, and one giving the details of the project. Guess what - both forms don’t look like forms, and both contain almost identical information.
Example 1 — when to submit for a 12-month period of account (one accounting period)
If the period of account in which you incur R&D costs runs from 1 January 2024 to 31 December 2024 (your y/e = 31 Dec) then submit the claim notification form between 1 January 2024 and 30 June 2025.
Note the last date is ONLY 6 months after the year end, so you can't do it with the CT Return etc.
And then, also by the same date, there is another form you have to file with virtually the same info on. Why require one form when two will make it harder .....?
There is a sort of get out where if you are an existing claimant you don’t need to file the two new forms every year. HOWEVER, if later on HMRC in their wisdom challenge your CT600 tax return, you will already be out of time to file the missing returns….. job done say HMRC!
“From 8 August 2023 you must submit an additional information form to support all your claims for R&D tax relief or expenditure credit. If you do not submit the additional information form, your claim will be invalid.”
and also
In case you think we are making this stuff sound hard, here are quotes from a real HMRC enquiry.
"What advance in the field did the project create?" (where did we start from)
And then
"An explanation of how the project has sought an appreciable improvement in the overall knowledge or capability in this field of science or technology (and not the company's own state of knowledge or capability alone), where terms such as 'appreciable improvement', 'science', 'technology' etc are defined using the definitions outlined in the BEIS Guidelines. This should include a description of the specific advance of science or technology which the project was trying to achieve. Rather than stating the name of the product, process, functionality, etc, being developed you should consider what scientific or technological advance is being sought. Science does not include work in the arts, humanities and social sciences (including economics), so if, for example, there was an economic benefit then this would not count as an advance as economics is not a science or technology for R&D purposes. You will also need to show why the advance was not readily deducible to a competent professional. You will need to show that the persons leading the R&D project are themselves competent professionals working in the relevant field and are well placed by virtue of their qualifications and experience to determine whether or not the advance sought was readily deducible."
and
"Competent Professional
On the Schedule of information and/or documents I issued on the xx December 2023, I requested for the names and qualifications of the competent professionals who worked on the project and activity undertaken."
HMRC think to do valid R&D you need a qualification, M Zuckerberg might differ on this?
All this just highlights that this arena is not one to be jumped into without careful planning of the project, its aims, procedures to document it, retention of the outcomes evidence.
You might even think that a failed R&D project is the best outcome, as it is self-evident of its status! Your FD may not however be very happy.
Queries? Please do Email us.
Notes by abell limited ©
Source HMRC ©2010-24 http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD81960.htm
Contact us with any queries about this post
on abell@chartered.org or 0207 148 4785
Comments