“But we do web development, we don’t do research and development…”
These were the words of a digital agency prospect we spoke to recently, explaining why they’d never looked into making an R&D tax credit claim. After probing a little deeper it became apparent that the work they do certainly makes them eligible to claim R&D tax relief.
Moreover, with more than 20 employees, and the complex and uncertain nature of their web-service integration projects, R&D credits are likely to be worth at least £50,000 annually to this small business.
This inspired us to compose this post outlining some commonly held misconceptions we encounter, which frequently prevent companies giving tax credits the attention they deserve.
R&D tax credits can be complicated, even for taxation and accounting professionals. This is intended to shed some light on the subject in the digital sector and show the value of working in partnership with specialist R&D advisers.
“We only do R&D for our clients, not for ourselves”
Agencies often believe that research and development work they’ve been commissioned to do by their clients is ineligible for tax relief. Many believe their clients’ should be claiming for this R&D work (and they most likely also should be!).
If though, the subcontractor is undertaking an element of the risk by being contracted to do the work, then they could still be eligible for R&D credits. R&D credits are not limited to internal projects, they can also be client funded. And if the agency is working on a fixed price contract, then it is likely bearing some of the risk.
“We are innovating, but it’s not cutting edge research”
If a digital agency is seeking to “achieve an advance in science or technology” it may still qualify under the scheme. It can be hard to quantify what can often be considered relatively straightforward digital development as advancing either science or technology, but the distinction often lies in the approach adopted. Advancement in web and software development is less about developing new features and functions. It is more about the underlying processes that lie behind these features and functions. If there is technological uncertainty, then it could qualify.
For a web developer this may include; integrating disparate data systems in a new, or untested way, developing algorithms for onsite search, creating custom middleware, creating augmented reality experiences, complex CMS integration or developing bespoke, functional apps for clients.
If an agency is creating simple WordPress sites for clients, then this would be unlikely to qualify. But if the web development work is more complex, then R&D credits should be explored.
“We have not made a profit yet, so we have not paid any corporation tax to claim back”
Lack of profitability and paying no corporation tax is not an obstacle to making a successful R&D tax credit claim. Some of our largest claims have been for early stage companies, investing large amounts in developing new platforms and technologies, but with little revenue.
R&D tax credits can be paid as cash, providing much needed cash flow for start-up businesses, still investing heavily in developing their own intellectual property. Loss making SMEs are actually able to receive more in R&D tax credits than profitable companies, a loss making SME can recoup 32.63% of R&D expenditure vs. 24.75% for a profitable SME (rates apply to expenditure incurred after April 1 2014).
HMRC limits once restricted R&D tax credit claims to the level of a company’s NIC and PAYE contributions. These restrictions were removed for accounting periods ending after 1 April 2012, but it’s still common for start-up businesses to overlook R&D tax credits wrongly believing the restriction still applies.
“Everything we do is R&D”
Sometimes all the primary business areas of a company can be classed as R&D. Claims are worked out based on eligible expenditure, which can include salaries (including employers NIC and pension contributions), subcontractors and consumables.
The scheme is designed to encourage companies to carry out research and development activities. Pure R&D companies can expect to receive up to 32.63% of R&D expenditure (incurred since April 1 2014) back under the scheme, 24.75% of expenditure in the case of profitable SMEs.
“We have not done any R&D for a year or two”
An R&D claim can be made for your previous two completed accounting periods. So if a company’s accounting period ends on 30 August, they can currently claim for expenditure that took place between September 2012 and August 30 2014. After 30 August 2015, the chance to claim for expenditure in an accounting period ending August 2013 will be lost.
“<Trusted adviser> informed us that we wouldn’t qualify”
Despite best intentions, it is not unusual to find that digital companies (and businesses in other sectors for that matter) have been wrongly advised that they won’t qualify for R&D tax credits. Some of the processes, functions and other innovations can be difficult to identify as qualifying R&D by anyone except the most experienced R&D specialists. By working in partnership with specialist firms, accountants can add real value to their clients and avoid the risk of missing opportunities to make and maximise an R&D tax credit claim.
“We have received grant funding, so won’t qualify”
This is something we often encounter, particularly when the company is right at the forefront of innovative research. While it’s true that receiving government aid can often limit the amount that can be claimed under the scheme, provided a company is registered for corporation tax, they can still potentially qualify.
How working with specialist advisers can help you and your clients
R&D claims can appear daunting, and the HMRC guidance on software development makes for pretty heavy reading for almost anybody - including qualified taxation professionals. If you would like to explore a partnership with experts in this field who can identify and maximise a claim then contact ForrestBrown today.