VSJ – March 2007 – Members’ News

According to research by Deloitte, less than half of SMEs in the UK are taking advantage of available Research and Development tax breaks. Almost 25% don’t know they exist. So we asked Jason Hewetson of R & D Tax Partners to outline what’s on offer to the software industry.

R&D Tax Credits are the biggest single funding mechanism for business R&D provided by the Government. Many companies are missing out on these refunds for software development projects, as they do not appreciate that the work they undertake is classed as R&D.

The R&D Tax Credit System was first introduced for SMEs in April 2000 to stimulate investment in science and technology innovation within British industry. R&D helps companies improve profits and grow by creating new high value-added products, processes and services. In 2002 the scheme was extended to larger companies, including groups. For the purpose of this article I’ll refer only to the SME scheme, as different rates and rules apply to large companies. The definition of an SME is a company with fewer than 250 employees, annual turnover below €50 million and a balance sheet total not exceeding €43 million.

Who can apply? Any UK limited company that has been trading for at least one year, paid a minimum of £10,000 in PAYE and National Insurance for the financial year and has undertaken R&D activity.

For every £100 spent on R&D projects the company is entitled to £150 tax-free income. The tax credit can either reduce a company’s tax bill or, for SMEs not in profit, provide a cash sum. A company can submit an R&D claim for the 2 years prior to their current financial year. This means that if you undertook R&D projects in those years you have definitely paid too much corporation tax and are entitled to a refund. The scheme is also applicable for companies in a trading loss position. The enhanced losses created by the tax relief can be surrendered for a cash repayment at 16%.

What is an R&D project? An R&D project is defined as one that seeks to achieve an advance in science or technology. Even if the advance sought by the project is not achieved or not fully realised, R&D still takes place. In summary a project that seeks to:

  • extend overall knowledge or capability in a field of science or technology
  • create a process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology
  • make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes, or
  • use science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way (e.g. a product which has exactly the same performance characteristics as existing models, but is built in a fundamentally different manner)

will be R&D.

Defining whether a project is R&D can be difficult. This is an area where specialist knowledge is invaluable.

Examples of R&D software projects are:

  • The development of new operating systems or languages
  • Resolving conflicts within hardware and software, where there is an absence of a known solution
  • Creating new or more efficient algorithms whose improvements depend on previously untried techniques
  • Creating new encryption or security techniques that do not follow established methodologies.

What if the project is for a client? Providing the nature of the project is R&D, you are entitled to claim tax relief. Even if the IPR of the software is passed to the client you can still claim. However if the client is also claming R&D tax relief for the project you will not be able to claim the full entitlement.

What costs are included? The costs included in a claim are those that directly relate to the eligible work. In the case of software development, these would be staff costs, subcontractor’s costs, base cost of software packages including upgrades and consumables such as heat and light.

To find out more, contact enquiries@rdtaxpartners.co.uk, visit www.rdtaxpartners.co.uk or telephone 01858 445522.

We’d also like to remind members that they are entitled to a free telephone consultation on any general accounting and tax issues with Vantis WS.  Contact Gordon Morrison or Iain Ferrie on 01189 748500.

[Don’t forget to email eo@iap.org.uk with items of news about you or your company.]

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