On the back of government consultation, tax relief for companies involved in development activity is set to become even more generous and software development companies should ensure that they are taking advantage of this valuable relief, writes Samantha Vanags, head of R&D, at Grant Thornton UK LLP.
The term research and development (R&D) typically conjures up images of scientists in laboratories wearing white coats, reminiscent of scenes from a James Bond movie. It is perhaps for this reason that many companies which are genuinely involved in development activity, especially those in the IT sector, fail to take full advantage of the tax breaks available to them. In cash terms, the relief can be worth as much as 26% of any qualifying costs.
Qualifying software development activities
A project will qualify where it seeks to achieve an advance in technology through the resolution of technological uncertainty. This definition can encompass a wide range of activities, but can be difficult to apply in practice in the IT sector. Fortunately, HMRC appreciates this and has provided further advice regarding the application of the definition to the development of software.
The most likely qualifying situation referred to by HMRC arises where the software being developed represents an improvement or advance on what is currently available. Any activities that directly contribute to achieving the advance through the resolution of technological uncertainty are R&D.
But what is meant by "uncertainty" in this context? HMRC states that the work must not be "readily deducible" to a competent IT professional. Uncertainties that can be resolved through established methodologies would not therefore qualify as R&D. This still leaves many activities that would qualify, many of which might be the "bread and butter" of a software developer. They are perhaps best illustrated by way of example.
Consider an IT project, the aim of which is to increase the speed at which a piece of software carries out some calculations. One solution would be to increase the available memory which, being readily apparent to a competent professional would not be R&D. Another might be to create new, more efficient algorithms whose improvements rely on previously untried techniques, which would be R&D.
Uncertainty can also include "system uncertainty". We see this frequently in practice where components are integrated for the first time. Uncertainty arises over how they will behave when combined into a complex system.
Costs only qualify where they fall within specific categories, the most significant of which are staffing costs and externally provided workers. The scheme therefore tends to favour labour-intensive industries and it is perhaps surprising that we don't see more claims by the IT industry. Other categories include consumable items, software and, in limited circumstances, subcontracted R&D.
Making a claim
Developers who think that the activities they are involved in could qualify should bring this to the attention of their finance department, which will be able to discuss the matter with their tax advisers.
Samantha Vanags, head of R&D, at Grant Thornton UK LLP, can be contacted on 01865 799805. She is responsible for a specialist team with a wealth of experience in preparing R&D claims on behalf of their clients.
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