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How can SaaS or Software Companies can utilise their Research and Development (R&D) Tax Relief claim from HMRC

R&D Tax Relief for SaaS and Software Companies

Over the past two years, the number of new technology companies launched in the UK increased by 80%. The main driver of this growth was London. This growth has in fact exploded over the past ten years, with the UK’s technology sector now estimated to have a value of more than £180 billion.

HMRC recognises that this growth is largely due to the ability of London’s SaaS companies to approach problems with an innovative mindset and looks at problems through a new lens – the very essence of research and development.

Coupled with this, the UK government is keen to avoid “brain drain”, with talented developers leaving for destinations that provide may offer greater incentives, such as Silicon Valley.

For these reasons, the UK’s generous R&D tax credits scheme is available to technology firms, ranging from tech startups all the way through to the country’s most prestigious names.

 

What Is Eligible For R&D For A SaaS Company?

 

The overall requirement that HMRC sets out is that a SaaS company that seeks to make a claim has undertaken development work that involved overcoming difficult technological problems.

This development work could include creating new (or improving existing) products, processes or services, or even duplicating existing solutions but in a new way.

It can be helpful to delve a little deeper into HMRC’s guidance, which sets out four criteria that a R&D-seeking company should consider. These are:

Does my company have a project?

Am I seeking an advance in a field of science or technology?

Does the advance extend the overall knowledge or capability in the field of science or technology and not just the company’s own state of knowledge or capability?

Does the project involve an uncertainty that competent professionals can’t readily resolve and where solutions aren’t common knowledge?

The fourth criteria – that of technical uncertainty – is, in our experience, the most productive way of trying to weed out the would-be claims that are likely to fail. After all, if your CTO, developer, etc didn’t need to pause and consider how to overcome the challenge the project posed, it doesn’t sound like it was truly advancing capabilities.

Judging which projects and activities will qualify for R&D tax relief is usually the area where most people seek help. Experience has shown that companies can benefit from HMRC’s early involvement. There is information about our Advance Assurance scheme, which helps with these issues, later in this guide.

 

What R&D Costs Qualify For A SaaS Business?

 

This is not an extensive list but here’s the main costs that a SaaS business would likely seek to claim for a R&D project:

Direct staff costs includes salaries, wages, employer’s NIC, pension contributions and any associated benefits in kind. Its possible to claim for employees who undertake “hands on” R&D work as well as a reasonable proportion of management time spent directing and managing employees working on the R&D project. Administrative staff do not normally qualify, except if involved in “qualifying indirect activities”.

 

Externally provided R&D staff (i.e. subcontracted R&D). Where a third party is paid to undertake R&D on a company’s behalf, these may be claimed. However, relief is likely to be given at the rate of 65% of the cash spend. There are special rules if the company and third party are connected.

 

Software directly used in the R&D. The key word here is “directly”. Where direct R&D software costs cannot be clearly identified, such as server costs, these cannot be claimed.

Unfortunately, its not possible to claim R&D relief for the commercial production of the SaaS service, any capital expenditure incurred, or payments for patents or trademarks (as these are the cost of protecting the completed R&D).

 

How Does My SaaS Business Claim R&D Tax Credits?

 

R&D tax credits are claimed via a company’s corporate tax return (called CT600) after the end of an accounting period.

In theory, it’s as simple as entering a few figures into the tax return. In reality, HMRC will want a company to provide further evidence of the qualifying R&D work undertaken, to support the figures entered into the tax return.

There isn’t a predefined format or schedule that a company should use for this exercise. Instead, HMRC asks companies to provide the information that it considers necessary to support the claim.

DC Accountants has, over the years, developed a format – which we call a Technical Document – that covers the main areas that we know HMRC want a company to document and what support is necessary.

Once the tax return and supporting information have been submitted, you’ll have to wait until an HMRC inspector has reviewed your submission. The turnaround time varies depending on how busy HMRC are. Currently, HMRC wait times average 6-8 weeks between the tax return being submitted and the tax credit being paid.

If the tax inspector raises questions or concerns, you’ll need to address these. If the HMRC inspector is happy with your submission, the corporate self assessment tax return is filed and the tax credit paid to the company’s nominated bank account.

Dennis Chen

Dennis Chen

Dennis specialises in helping SaaS companies and technology firms profit wildly by efficient tax-saving strategies and significant research and development tax relief.

About Me

Dennis specialises in helping  SaaS companies and technology firms profit wildly by efficient tax-saving strategies and significant research and development tax relief.

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