R&D tax relief for digital and tech companies - All you need to know
Over the last decade, the UK has been a world leader in technology. The pandemic has increased reliance on technology, especially digital forms of communication and social media. During 2020, the number of tech jobs on offer in the UK was on average 259% higher than in continental Europe.
The number of digital companies in the UK has also increased in recent years. Figures gathered by the Office for National Statistics and Companies House, and analysed by Tech Nation, reveal a total of 19,465 new UK tech businesses were launched in 2020. That’s a new tech company launching every 30 minutes.
You may be pleasantly surprised to learn that a lot of their development work could be eligible for the scheme.
Digital and Tech in the UK
The annual Tech Nation Report shows that the UK tech sector has emerged largely unscathed from the effects of Brexit and the global pandemic. In fact, the figures from 2020 demonstrate that the sector is still on an upward growth trend. Deep tech investment in the UK went up 17% during 2020, the highest rate of growth globally. On a broader scale, the tech sector’s GVA (Gross Value Added) economic contributions have been growing by an average of 7% since 2016.
The latest data from the ONS on R&D tax credit claims reveals the number of claims coming from each sector of the UK economy between 2019-2020. This sector was responsible for 19% of R&D tax credit claims during the above period.
Technology also has a large part to play in the UK government’s ‘levelling up’ strategy. As a result, the future for UK tech companies looks bright. As confirmation of this, the UK government seems to be continuing to invest heavily in the digital technology industry. Annual investment in tech increased from £1.2bn to £11.3bn between 2010 and 2020. In addition, according to the Digital Economy Council, £13.5bn of venture capital has been invested in the UK’s tech sector during the first half of 2021 alone.
Qualifying R&D activities within the technology sector
Many projects undertaken by technology companies involve the production of new products and processes, which means a lot of the costs incurred by the sector will qualify for R&D tax credits..
Here are some broad examples of the types of qualifying R&D work that is likely to come from the technology sector:
- Technologies to improve manufacturing processes.
- Developing new software or improving existing functionality
- Developing and testing prototypes.
Below is a list of roles commonly found in digital tech companies along with their qualifying R&D work.
Website development on it’s own is unlikely to qualify for the R&D scheme However, if there are significant challenges that arise due to new functionality requirements, there may be scope to apply some costs under the R&D scheme.
Below are some examples of web development work that you may be able to include:
- Development of new algorithms
- Developing cross-platform capabilities across existing software.
- Enhancing publishing and cloud-based management systems.
- Developing cyber security tools for e-commerce websites.
- Integrating software components into a single unified system.
- Developing digital marketing technologies (third-party software tools).
E-commerce includes the transmission of data and funds, with these transactions taking place between businesses (B2B), businesses and consumers (B2C), or any combination of these.
Setting up an e-commerce marketplace is a relatively straightforward task. However, developing new features can be costly and complicated, which can entail the resolution of technical uncertainties as data and transactions grow. These technical challenges are important to be aware of, as efforts to overcome them have the potential to qualify for R&D tax relief.
Here are a few of the common areas that e-commerce may be able to claim for:
- Automation of promotions and discounts: Special offers often complicate the checkout process and can lead to error. E-commerce websites have to calculate and validate multiple promotional inputs through an automated checkout system, this may not be a straightforward process.
- Staggered payments: Some purchases require a sequence of payments. Examples include required deposits for travel packages and hiring equipment. As above, this process may need more complex integrated solutions.
- Product availability: Some products have multiple options and websites need to accommodate the range and how they combine. Creating a seamless customer experience may qualify as R&D work. Note, front end design rarely qualifies for R&D, the focus is on technical back-end challenges
- Eligibility checkers: Purchases may require background information on buyers, like credit scores. As a result, links to other databases or systems may be necessary, this may not be a straightforward process.
- Integration with third-party sites: Integration with third party software to track deliveries and monitor stock levels can involve a few non-routine challenges.
Software development may be eligible for the R&D scheme.
In the past, the guidelines on qualifying R&D work have struggled to incorporate all elements of software development. These are outlined by the department for Business Energy and Industrial Strategy. However, HMRC is now expanding the allowable costs to be in line with current technology trends. You can expect this area of work will only open more doors to R&D tax relief in coming years.
HMRC are clear on what they won’t accept when it comes to software claims, however:
- Development of routine software characteristics.
- Maintenance activities that fix minor faults.
- Activities that involve the transfer of software to production systems. This is because these activities usually occur after the uncertainty has been resolved.
R&D tax credits for data analytics and cloud computing
HMRC is expanding the scope of what qualifies for R&D tax credits to include data analytics and cloud computing costs. However, this is still an ongoing process. In March, HMRC published the results of their consultation on R&D tax relief in the UK. It saw businesses and industry groups across many sectors brought in to have their say. The focus was on the costs that companies can include in R&D tax credit claims.
The consultation concluded that developing methods to analyse data, as well as payments for cloud services are standard occurrences in modern R&D. The latter includes platform as a service (PaaS), software as a service (SaaS) and infrastructure as a service (IaaS) expenditure. Therefore, there is a strong case for them to be included in the R&D tax credit relief scheme in the future. No change to government policy has been made as of yet, however.
If your client works in this field, though, be sure to keep an eye out for updates to HMRC’s policy on R&D tax credits.
What made.simplr can do for you
As a digital tech company, your client will likely appreciate the value that technology can add to their business processes. Completing an R&D tax credit claim also falls into this category! That's why at made.simplr we’ve developed the software to help you claim R&D tax credits efficiently and accurately. Automation and integration are just some of the features we offer to help you ensure your client gets the full benefit they deserve.
Find out what else you can look forward to by booking a demo with our experts today.
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