Many happy returns
Oddly enough, the taxman actually wants to give you money. Peter Urey explains how to go about claiming it
“Man bites dog”, “Elvis found on Mars”, or “Taxman keen on rebates” all sound like the kind of unlikely headlines dreamed up on Mock the Week. The third, though, is not a joke - it’s true, just not very well known. You see, HMRC’s R&D Tax Relief Scheme actually applies to the IT channel: resellers and SIs as well as developers.
The precise wording of the documentation is complex, which puts some people off claiming. Essentially, you do not have to pay tax on costs related to new product development (concept creation, validation, prototyping and testing), materials replacement (improving an existing product to make it more saleable), systems integration (assembling known components with an unknown outcome), or process improvement (doing things better to improve commercial effectiveness).
Why? In order to service our national debt, cope with spiralling healthcare costs and a shrinking taxable workforce, we should be spending three per cent of GDP on R&D. We are only spending 1.7 per cent, and this proportion is falling in real terms. Without innovation, our quality of life will slowly degrade as well. The EU has created a fund to rebate tax on activity linked to innovation, and IT is the sector with the greatest potential for growth through innovation.
For example, integrator CAE Systems recently recovered a substantial amount of money in rebates for work done over the past two years in building an IP telephony solution for local government. We demonstrated to HMRC that the work resolved a systems uncertainty - a trigger for eligibility under the scheme.
CAE used standard components to solve a problem. Individually, these components were well understood, but their performance when assembled was uncertain. Considerable intellectual effort and expertise were required to deliver the solution. It was never possible to simply refer to a manual or search online for the answer. Prototyping, testing, validation and software coding were all required.
These recovered costs would have been recoverable even if the solution proved unworkable or the client declined to go ahead. The scheme rewards the effort required to break new ground - not the outcome.
At face value, web design might not appear to qualify. The scheme does not cover marketing costs, but when we dig deeper it is clear that it is only the front end of a solution-building process. So, in another example, website design agency Addictivity linked its website design to back-end content management systems, including integration with online app development. It can recover tax on costs related to building bespoke solutions. We helped Addictivity to claim significant tax relief via the R&D relief scheme.
Claims for activities linked to process improvement can be significant. ERP can cost millions. The scheme removes tax overhead associated with the specialist innovation needed to get new products to market faster, and on a lower cost curve. The costs of outside consultants to assist with business and process redesign are also covered.
Double whammy
Clients of the channel can also claim for the costs they incurred in the development of the solution, as well as costs incurred in the solution-building process.
Yet in the latest available report on use of the scheme, only 7,900 small companies across all sectors made successful claims. Awareness is still low and there is capacity for a significant increase. You will not be required to detail specific R&D spend over the past two years because a specialist firm can do this on a no-win, no-fee basis. And you do not need to have made a profit yet - it can be used to recover PAYE and National Insurance.
If you work within the letter and spirit of the scheme, furthermore, you will find HMRC sympathetic to well-argued applications. You will not be provoking HMRC by making such a claim - you are entitled to do so under this R&D relief scheme.
Peter Urey is a tax consultant at MPA Group