Whilst R&D claims from the ‘information and communication’ sector (which includes software development) account for a quarter of all R&D tax relief claims submitted to HMRC, they can be some of the most complicated to prepare and assess. Much of the challenge stems from applying the definition of R&D for tax purposes to what can be quite an abstract and difficult to appreciate industry for those not familiar with software development. Consequently, there is much inconsistency in the preparation and assessment of software R&D tax relief claims.
Having recently attended the ‘Research and Development Consultative Committee’, PKF Francis Clark have learned that to address this problem, HMRC are scrutinising software claims more closely and have started to consult their in-house ‘technology office’ to check that the projects included in claims meet the definition of R&D. The technology office include specialists with backgrounds in, amongst other things, databases, mobile technology, software architecture and networks. In addition to providing input on a case by case basis, they have also begun a programme to educate the wider R&D specialist teams in software development in the context of the BIS guidelines on the meaning of R&D.
The intention for HMRC is to bring greater consistency for claimants and greater confidence for themselves that relief is only being awarded to deserving cases. As a result and in practice, we are seeing queries raised on increasing numbers of software claims making it all the more important to ensure that eligible projects are accurately identified and adequately described in the context of the strict definition of R&D. The following are just some of the frequent issues that the technology office noted in their assessment of software claim descriptions:
- Quoted advances are frequently business related rather than technical in nature;
- Over-use of certain terms which lack substance E.g. Agile, Synergy, Efficiencies;
- Uncertainties are generic and should be more specific.
HMRC have stated that they will be looking for much more substance in their review of technical descriptions and have offered the following advice to those identifying and describing projects:
- Ensure that the requisite advance identified is technological or scientific in nature rather than business related;
- Be specific in identifying technological or scientific uncertainty and where possible, these should be directly related to the associated advance in technology; and
- It is helpful to explain the solutions sought to address the technological uncertainty explaining why normal approached are not adequate.
If your company is involved in software development and you are claiming or think you might be eligible for tax relief, we would encourage you to get in touch with our specialist innovation incentives team who would be happy to help you ensure that robust claims are prepared and will stand up to the increased level of scrutiny we are seeing from HMRC. Potential claimants should note that they have up to 2 years from the end of an accounting period in which to make a claim. Accordingly any companies with December year ends have until the end of this year to submit their 2015 claims before falling out of scope.