Most people who are in technology often have common misconceptions in regards to R&D tax relief. I have listed some of the most common ones-
- Only new software qualifies
This is not true. Even if the software currently exists, improving existing software and overcoming new challenges, still counts as genuine R&D. A rival software developer may already have the capability you seek. But, if your experts don’t have that technical information available to them — experimenting to discover a solution — then that’s still qualifying R&D activity.
- Part of the project wasn’t R&D
Even if the project has standard elements within it, if a new aspect was implemented, it still constitutes R&D. For instance, if there is a new component that fits into a larger existing system. This could still be valid R&D providing there were underlying technological uncertainties that needed be resolved within the additional component and its incorporation into a wider system.
Some businesses limit the scope of their R&D by failing to include project management, development of tooling for the product and indirect activities that qualify, like certain finance activities.
- We weren’t taking a financial risk
One of the key criteria of a qualifying R&D tax credit claim is that there is uncertainty in the outcome. i.e. you don’t know for sure if what you’re doing is going to be successful. If this uncertainty is present in your project, you will be taking a financial risk in undertaking the project, and therefore it may well qualify for R&D tax credits.
- We used subcontractors and they don’t qualify
Providing that the work they perform on the project is R&D, the use of subcontractors does indeed count as qualifying expenditure on an R&D software project. And this is still the case even if the subcontractors are based outside of the UK.
- Capitalising software expenditure doesn’t have an impact on my R&D tax credit claim
Another area of confusion is to do with the accounting and tax treatment of software development. Capitalising the costs of software development is a common practice for accounting purposes. Indeed, some businesses that work by outsourcing software development are often recommended to capitalise software R&D costs.
Imagine this scenario: You’ve spent a lot of money on a big project which is intended to benefit your company for years to come. Your business (or your accountant) spreads out the costs on the balance sheet over multiple accounting periods. This is where you make your company appear more profitable in the current year to give more clarity to shareholders and investors. This is entirely normal.
It does not stop you from claiming R&D tax credits. But what’s important to bear in mind is that capitalising expenditure in this way could have an impact on the size of your R&D tax credit claim. Fortunately, there is a tax mechanism to allow you to do both, but it takes expert analysis to decide which is most beneficial to your business.
Therefore, you should carefully weigh up the pros and cons of doing this with a chartered tax adviser that specialises in R&D tax credits.
How DC Accountants can help with your software R&D tax credit claim
DC Accountant’s combination of specialist technical expertise, tax knowledge and understanding of HMRC’s R&D tax credit claims process, means that we can maximise your claim and ensure you receive the tax credits you are eligible to.