Share this content
0
20
7391

confused about R&D

Previously we have had clients who have developed computer programs both web based and PC where the use fitted all the criteria.

We now have a client in the computer industry who has developed a program which is totally innovative and gets a tick in all the right boxes until, i look in Lexis Nexis, where it says that HMRC do not consider the development of a computer program (unless as part of a greater purpose) as a qualifying activity for R&D.

Is this right and we have been lucky in the past, or can i claim tax credit for a stand alone program?

Replies

Please login or register to join the discussion.

I think its ok

I hope so - we have been doing just that. Pretty sure software is included, not least as I have discussed it with the R&D department who are suprisingly helpful about one of my clients. They are a bit like VAT or CT used to be ie a real person who will speak to you as an adult and dig out the reference for you so you can look it up.

 

Thanks (0)
avatar
21st Feb 2011 18:09

To get an R&D relief, you need R&D...

... and software development isn't generally considered to be R&D.

R&D is effectively defined by guidelines issued by the DTI (see http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD81300.htm).  For there to be R&D, there needs to be an advance in science or technology through the resolution of scientific or technological uncertainty.

Software development seldom achieves that, because as solution is identified prior to development and known methods are used to achieve that known solution.  Just because the solution itself is innovative, doesn't make the development of software using known methods to achieve that solution R&D, as no scientific or technological uncertainty has been resolved.

HMRC's view is well discussed at http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD81960.htm.

My suspicion is that you have had a certain amount of luck in your past claims.

Software costs for R&D purposes are, however, an permissible R&D cost.

Thanks (0)

.

The key is what your client actually DOES.

Mine was developing a new graphics engine.

That is to say I am assuming you are not talking about somone knocking up a few websites or databases.

 

Thanks (0)
avatar
By blok
22nd Feb 2011 12:58

.

http://www.jumpstartuk.co.uk/

If the figures are high enough, i strongly suggest you speak to these guys.

In my opinion, its not an area accountants should be getting involved with the nitty gritty detail. 

With the best will in the world, its a scientific issue, we are not scientists!

Regards

 

Thanks (0)
avatar
22nd Feb 2011 13:37

I don't agree

I see no reason why accountants shouldn't be "assisting" clients with claims.

R&D reliefs relate to scientific and technological advancements.  Whilst accountants may not understand the science/technology bit, the clients clearly do.  So the accountant can explain the rules to the client, the client can provide the detail, which the accountant can review to ensure that there are no non-allowable costs (like science journals) claimed.

The client by definition understands it and can measure the extent to which they are making a scientific or technological advancement by resolving scientific/technological uncertainty, and is also capable of identifying which costs relate to the particular project.  They just need guiding through the tax rules/accounting bits.

I agree that specialist work should generally be dealt with by specialists, but you're missing a trick quite frankly if you farm out this work, because when it comes to R&D the specialist in any given scenario is the client.

Thanks (0)
avatar
By blok
22nd Feb 2011 14:00

.

If I was the client I would want someone with experience who is familiar with the practicalities of all this. I simply dont have the time to invest in learning this inside out for the sake of one or two clients who will be affected. For me it's a no brainer, hire someone who knows what they are doing and the client gets the best possible result. I can concentrate on the stuff that I do regularly. Maybe you are different, but my thoughts on this is that mainstream gp accountants will be quite poor at this. (not all!, they just don't have the time or motivation) Whilst some clients will understand this, I think the most of them will get lost. There was a similar thread last week on capital allowances, same issue.

Thanks (0)
avatar
By PennyC
22nd Feb 2011 14:40

I agree 100% with Blok

It is all very well asking the accountant to prepare the R&D claim, but before he does so he needs to fully understand exactly what can be claimed. It is a highly-specialised area and unless you have carved out a niche accountancy practice dealing with significant numbers of claims, the time and costs involved in spending sufficient time with the client to establish what qualifies cannot be justified. It is no different to me relying on a capital allowance specialist QS to tell me what plant etc in a building qualifies for allowances. I could make a stab at it, but I'm a tax adviser, not a surveyor, and would almost certainly underestimate.

And you only have to look at one of the testimonials (assuming they are genuine, of course) on Jumpstart's website to see an example where the accountant was happily submitting claims on behalf of his client but which turned out to be inadequate. If he'd spoken to the client could he have increased the claim? Quite probably. Would he have identified all relevant projects and expenditure? Quite possibly not.

So I would agree that it could be a lucrative source if you want to specialise in it. For most general accountancy and tax practices that will not be a viable option if you have your clients' best interests at heart.

Thanks (0)
avatar
22nd Feb 2011 15:15

On that basis...

... how do you select the clients that you refer to the specialist in the first place?

This isn't the same thing as capital allowances claims in respect of buildings, which I agree is a specialist area as neither you nor the client have the necessary expertise.  This is an area where you and the client between you do have the requisite expertise by definition.

If the effort were invested to fully research the issue (and this is an area where HMRC's guidance is quite frankly bucking frilliant), you'd find that claims can probably be made in respect of more than just the odd one or two clients.

So the interests of the odd one or two clients where you consider the issue get served very well, but the rest of your client base get overlooked because you regard it as a specialist area.

My experience has been that most claims need to be tempered because of the client's enthusiasm.  I've never felt in danger of underclaiming quite frankly.

Let's not forget that the starting point for defining R&D is SSAP13... an accounting standard.  Not to mention that the DTI guidelines that extend the definition for the purposes of the reliefs are also very well written.  And let me just mention again how wonderful HMRC's guidance is in this area; they damn near guide you through the process of making a claim and even provide calculation templates.

And don't forget, the guys on the other side aren't scientists either.  HMRC's R&D specialists are technical tax staff.

Thanks (0)
avatar
By blok
22nd Feb 2011 15:30

.

Thanks Penny.

"how do you select the clients that you refer to the specialist in the first place?"

easy, identify them and then refer them!

"And don't forget, the guys on the other side aren't scientists either.  HMRC's R&D specialists are technical tax staff".

That doesn't help me understand the sciene behind this any better.

"If the effort were invested to fully research the issue "

Thats my point, I dont have the time or most probably the scientific mind and attention to detail.

By the sound of it I think you could do a good job at this, however I stand my ground.  The majority of GP accountants wont have the same mindset as yourself.

Why lose sleep over this?  Pass it on and charge out the time doing work you can get better recovery on, instead of charging the clients for on the job training!

I referred a case to Jumpstart a few weeks ago.  Yes they charged handsomely, but client got large repayment, (with our help processing and carrying losses back etc, which we charged for).  EVeryone happy.

We could spend the next two weeks discussing whether or not the OP's client has activity that qualifies for enhanced R&D allowances and we would still not have a conclusive answer, why not? because its all subjective and individual.

Personally I would rather just ask someone who knows the answer because he deals with it everyday.

 

 

Thanks (0)
avatar
By PennyC
22nd Feb 2011 18:19

The other side

Actually, you will find that many of the HMRC R&D staff, particularly the ones that matter, come from technology backgrounds and - a rare thing - they actually take an interest in what they are doing.

Thanks (0)
avatar
25th Feb 2011 06:36

R&D tax credits

Good morning,

I am a Director of Jumpstart and have read the comments below with interest.

The first thing I would say is that we all have a part to play in supporting and assisting clients to secure the best possible result when applying for R&D tax credits. Our philosophy is that we maximise and accountants utilise.

We are technologists who have been deeply trained in the legislation and how it applies to a different sectors. Our analysts are normally PhD qualified and understand the technology in the same way as our clients do. The difference being we know how it can be applied to the legislation to maximise a claim.

However we often deal with complex tax structures and we work with the company accountant on how this can benefit the company most. (On an aside if there is any accountant out there that can help with Korean withholding tax then your help would be much appreciated.)

The best possible recipe for the company is to have the technologists who understand the legislation sit next to the accountant who understands the legislation and work as a team to get the best outcome. Initially we were seen as competition by the Accountancy profession until we signed up a number of accountancy firms to work in partnership with us. We then got the opportunity to show that we did not replace them but augmented them. They still did the work they always did and on many occasions they did more and as a result added more value to their clients.

We have completed over 1900 claims throughout the UK and work with companies from 10 employees up to 6000. If you want to be added to our communication newsletter that keeps you up to date on what we have found in various sectors then feel free to drop me an e-mail and I will make sure that happens. We are happy to give free advice because we believe, like many accountants, that knowledge on its own is not the secret but how we apply that knowledge. If anyone wants to work in partnership with us we would be delighted to hear from them also. Just e-mail me on [email protected]

Together we can act in the best interest of our clients.

Brian

 

Thanks (0)
By RandD
28th Feb 2011 15:11

Software R&D Tax Credit Claims

I'd like to add a comment to this thread - I am Micah Levy, the  director of a boutique consulting firm (http://research-and-development-tax-credits.com) specialising in R&D tax relief claims particularly for software companies. I authored the training material for HMRC inspectors on how to handle R&D software claims and led the training of the HMRC R&D specialist unit inspectors at their training school. While I worked for one of the big 4 firms, leading hundreds of software R&D tax claims over more than 5 years,  I helped a range of software companies claim more than £500m in R&D tax relief.

I'd like to start by clarifying that the poster who said software R&D claims don't qualify, is in a nutshell, talking  total nonsense. If you want, look down the DTI R&D scoreboard and see for yourself.

Onto the question of whether and what software development qualifies.

Of course software development qualifies but the projects have to meet the same criteria as any other R&D project, namely that they have to seek a technological advance by overcoming a technological uncertainty (as per the DTI criteria).

The issue with accountants advising on R&D tax relief claims is that typically their first question to the client will be 'tell me how much R&D spend you have'. This then involves the client trying to understand the tax definition of R&D as per the DTI Guidelines (with no way of knowing if they have correctly understood it) and also then trying to work out how that maps on to the practical day-to-day activities that they carry out.

Additionally, at this point, companies tend to underclaim because, using software as an example they do not necessarily include all the supporting activities that are eligible but only look at the core developers and ignore things like late stage testing, development and integration once a product has already been shipped. 

Simple 'use' of an off-the-shelf program, as opposed to development of the program in the first place is not likely to involve any technological uncertainty.

Specifically the eligibility is usually found in the non-functional aspects rather than the features and functionality of a piece of software as ultimately the relief is a technology test that is given for the development and whether the application is embedded,  PC-based, mobile or web-based; whether it involves RoR, LAMP, databases, cloud computing, virtualisation, new algorithms, new API integration mechanisms or other type of technology  where there is technological uncertainty to a notional competent professional- this is the key as to potentially what qualifies. Claimants also have to separate the technological uncertainty (which is the key to quantifying eligibility) from the commercial and business uncertainties that frequently arise.

Finally, I work with a number of accountants who refer clients to me for specialist consulting advice - the benefit to them is that in addition to them receiving a share of the benefit, they receive expert advice in this area, while still being the client's point of contact - in short it allows them to offer a value-added service to their clients, while the client gains a no-win no-fee arrangement that usually surpasses their expectations as to how much they are entitled to.

If anyone has any further queries, then please feel free to drop me a line at [email protected]

Micah Levy

http://research-and-development-tax-credits.com

Thanks (0)
By RandD
28th Feb 2011 15:34

Software R&D Tax Credit Claims

Just one other word of warning for claiming companies given some of the comments above: HMRC aims to make 95% of its R&D tax credit payouts within 28 days.

One point that is frequently not realised is that it's very easy to put in a bad R&D claim and for it still to be paid upfront and unchallenged (after all, it's just a number in the tax return box). By bad, I mean a claim which can't be adequately substantiated or where the legislation has not been correctly understood. HMRC could quite easily take the view that putting in a claim like this is negligent, pushing the time limits for assessments out to 20 years.

[FA98/SCH18/PARA52-3 prescribes the time limits for making assessments under Paragraph 52. The time limit is the latest of:

four years after the end of the accounting period to which it relates,the end of the accounting period following that in which the amount being recovered was paid,three months after the completion of an enquiry into a relevant company tax return.

In cases involving fraudulent or negligent conduct, the time limit is extended to 20 years after the end of the accounting period.]

It is therefore essential for companies to understand from any provider:

1. what assumptions are being made in putting together the claim and assure themselves they are realistic, justified and correct.

2. what is the substantiating material (and contemporaneous evidence) that has been prepared in the event that HMRC queries the claim after 3 years.

3. is the provider obliged to return their fee in the event that a claim has to be repaid several years later

 

Micah Levy

http://research-and-development-tax-credits.com/

Thanks (0)
avatar
28th Feb 2011 18:27

@Micah

I'm the talker of total nonsense, for it was me that, with the help of your babel fish, seems to have said that "software R&D claims"don't qualify".

Only that's not what I said; I said "software development isn't generally considered to be R&D".  I then elaborated in similar terms to yours.

I concluded by saying that "software development seldom achieves that [the resolution of scientific or technological uncertainty] because of the prior identification of the solution.  Those comments are broadly consistent with yours and are certainly consistent with HMRC guidance.

I think that the only essential difference between what I've said and what you've said, is that, whilst you were pitching for business (late!), I was simply (1) answering the question and (2) trying to encourage fellow professionals in being less shy about pursuing this kind of work.  At the end of the day, as Brian has noted, the extraction of the necessary financial data is a task to which accountants are well suited to perform, and contrary to many opinions offered are able to get their "tiny little heads" around the "clever stuff".

Brian's "right of reply" was well measured and welcome.  Personally I found yours patronising.  Great pitch!

Thanks (0)
avatar
By blok
28th Feb 2011 19:23

.

Cirius, I think you are being rather harsh on our new friend.  He obviously knows his stuff but was perhaps was quick to dismiss your good self.

 

but,

 

Would you now agree, given what has gone before this post, that R&D credits are best dealt with by a specialist, if the amounts warrant it of course?

 

 

Thanks (0)
By RandD
28th Feb 2011 20:04

software R&D

I'll ignore the comments about style and stick to the question raised. What was said was:

Software development seldom achieves that, because as solution is identified prior to development and known methods are used to achieve that known solution.

You may have been answering the question posed, but incorrectly! Whatever else you wrote, the above generalisation is total nonsense and misleading.

Take a look here http://webarchive.nationalarchives.gov.uk/20101208170217/http://www.inno...

and see the extent of software R&D . Realise that all the financial sector R&D is actually software R&D so add that in too.

Software development often requires the resolution of technological uncertainty.

One principle that is different with software R&D to most other fields of science and technology is that while a solution may be identified prior to development, until it is actually developed, tested and implemented in a live environment there is still technological uncertainty, the resolution of which qualifies for tax relief. This can apply even if the software has been used in production -in software you have the concept of beta testing which is an extended part of the test cycle in a real-world environment- totally different to say, aeronautical R&D - you wouldn't fly a plane that was still 'in development' but this is very normal with software releases. This makes it very easy to underestimate or overestimate the amount of eligible R&D.

Yes, of course any accountant worth their salt can quantify the costs of R&D if they are told which costs are eligible.  That is trivial and is not really the point being discussed.

The "difficult" bit is in qualifying which costs are eligible R&D for tax purposes in the first place- making sure both that every eligible cost that can be included is included and that no ineligible cost is ever included.

Few claimants can do that accurately, and even fewer accountants.

Micah Levy

http://research-and-development-tax-credits.com

Thanks (0)
avatar
28th Feb 2011 23:47

Let me restate my generalisation

The proportion of qualifying software R&D to total software development that takes place in the UK (all sectors and all forms of software development, but excluding those that I identify as "computer services" below) is, I suspect, miniscule.

Now you're the one who's misleading us; the figures you have linked to refer to all activities that fall within the wider definition of R&D (to include pure research and applied development - resolved uncertainties finding applications), not just qualifying R&D.  The figures also aren't totals, they refer to growth, which will distort the relative proportions.

I do agree that any R&D in the financial services sector is more than likely software and computer services.  Of the software and computer services areas though, I'd expect a greater proportion of qualifying R&D to be found in the "computer services" area, ie delivering a solution; the new algorithms, virtualisation, cloud-computing, part of your spiel, which I would distinguish from mere software development (for its own sake) using an OS's API or a development environment like RoR, or web development using a LAMP server (or MS equivalent).

Nothing I have said though, was intended to suggest that software development is never qualifying.

I was seeking to dampen the OP's ardour, that he might question if further and refer directly to the HMRC guidance on the subject.  Might I also add that I was seeking to do so without the scaremongering of Micah's second post before my last.

A claim devised by client and accountant will not be negligent simply because it is wrong.  Most claims made by most people will not be 100% accurate.  There's no such thing as a perfect solution in a subjective environment.  Any two people looking at the same situation are likely to come up with differing (but hopefully not dissimilar) claims.

I'd just add, that whether a taxpayer is negligent or not is not a matter for HMRC to decide; they can only allege it - the courts are the only authority to determine such an allegation.

@Blok - No.  Not for the most part.  If I came across a client who didn't seem sufficiently competent in their field (or didn't have such staff), then yes an expert in the field would be needed.  Also, if I thought it was going to take me longer to identify with the client or their staff just where the uncertainty was being resolved, then a specialist might be necessary.  Otherwise, I'd generally only look outside the client for technical/scientific input in the event of dispute.

I'm perfectly happy that I've got all the competence needed to deal with the legal and accounting elements (that's what I do for a living) and, not having suddenly just arrived from a pre-industrial revolution land, often find I understand some of the "science" too.  My experience is that most clients can be briefed on what a project is and whether it qualifies; they usually can't wait to tell you all about it; once a qualifying project has been identified, the associated qualifying costs can then be identified fairly easily.

My own experience of claims has centred around pharmaceutical and the software/computer services areas.  It is from this experience that my comments come.  Perhaps my mind's over-analytical and I'm making a distinction between software, middleware and firmware that nobody else is making, but it has been the general case that by the time development of software commences all uncertainties have pretty much been resolved.

I'm not saying that experts such as Brian and Micah are surplus to requirements; simply that they're not the same necessity as is the case for property capital allowances, with which this has been parallelled.  This is an area where accountant/tax agent and client can put in a suitably adequate and robust claim

At the end of the day though, I simply object to (1) being told I'm talking nonsense for saying essentially the same thing in a different way and (2) Micah's underlying inference that accountants are "numpties" who're incapable of communicating with their clients and their staff.

Thanks (0)
01st Mar 2011 00:01

Thanks for all that

At least my original curiosity about the blanket statement appears to have been correct! I just couldnt understand how something as wide ranging as software could be completely blanked out. It obviously isnt.

For the record all our previous claims have been for "things you can touch" and have also been checked by HMRC usually by a visit and relatively detailed technical knowledge.

Thanks for all the comments.

Thanks (0)
By RandD
01st Mar 2011 08:39

Software R&D claims

Cirius, you are convinced that by explaining the legislation to the client they are able to make an assessment of what qualifies and what does not, but at the same time you say

The proportion of qualifying software R&D to total software development that takes place in the UK (all sectors and all forms of software development, but excluding those that I identify as "computer services" below) is, I suspect, miniscule.

The issue here is that the tax definition of qualifying R&D as per the DTI guidelines is not the same as what most companies tend to think of as R&D and companies' tend to underestimate their eligibility.

Without specialist knowledge in the technology, you have no way of verifying their assumptions and indeed can erroneously end up believing that only a miniscule number of software development projects qualify.

Of the software and computer services areas though, I'd expect a greater proportion of qualifying R&D to be found in the "computer services" area, ie delivering a solution; the new algorithms, virtualisation, cloud-computing, part of your spiel, which I would distinguish from mere software development (for its own sake) using an OS's API or a development environment like RoR, or web development using a LAMP server (or MS equivalent).

I don't want to continue ad nauseam on this thread but aside from the incorrect definitions of services and development above it is entirely the other way around. Within eligible projects, IT services projects generally (which tend to actually be largely systems integration) tend to have a lower rate of eligibility than development projects.

The point is that under the tax definition of R&D you can rarely exclude a project based on the technology type, e.g. work with an API or web development on one hand , and for example, a virtualisation solution on another. It is possible for a project using either technology to qualify, or both, or neither - what matters is whether there are technological uncertainties present in the project and this is something that most advisors are not able to ascertain or challenge their client on without assistance.

Thanks (0)

Looking for R&D Tax Analyst

Hi All,

Apologies to jump in but thought you may be able to help me. Have any of you recently tried to hire a R&D tax analyst? We are currently  looking for an R&D tax analyst to sort out the paperwork for the R&D tax cases for our new clients.

The interviews we had so far were mainly with IT or Manifacturing Project Managers who have no financial background or with accountants with very little R&D experience.  What is your observation?

Thanks in advance for your feedback,

Linda

Thanks (0)