UK tech sector loses millions by failing to claim tax credits for R&D

Forty per cent of UK tech companies are losing out, warns tax consultant Mark Tighe

IT was a decade ago that the CBI got to its feet and lobbied to stop the government scrapping tax relief for research and development (R&D), as reported by Computing.

It was a defensive move as many tried to second guess what the Chancellor would do to balance the nation's books in the wake of the financial crisis.

It was also great publicity for the scheme itself which many, including Catax, suspected was under-used due to a lack of awareness. But the scheme isn't intended purely for major industrial or pharmaceuticals companies, investing in costly new processes or drugs.

Each new arrangement and installation of technology is a new business process when it enables your customer to do something in a way that has never been done in quite the same way before

Indeed, fast forward a decade and, according to the latest HMRC data [PDF], the information and communications industries recorded the highest number of claims for these tax credits of any sector. Manufacturing wasn't too far behind.

This ranking, however, creates a false sense of security. Although direct comparisons are hard to come by, the professional services industry under which IT falls, employs far more people and is much larger than the manufacturing sector.

The suspicion remains that IT companies should be claiming a lot more - and our own research supports this.

Of the IT firms we spoke to, more than 90 per cent of them had developed new products, services or business processes in the past two years - that's HMRC technical speak for ‘R&D'.

The installation of new technology can also require specific work-arounds to overcome some logistical or practical challenge, and that qualifies for tax relief, too

All these companies could therefore be eligible for valuable R&D tax credits but two-fifths of them have never made an R&D tax credit claim. This is remarkable in a sector which runs upon almost constant innovation.

It's not just about lines of code and programming. Each new arrangement and installation of technology is a new business process, by definition, when it enables your customer to do something in a way that has never been done in quite the same way before.

The installation of new technology can also require specific work-arounds to overcome some logistical or practical challenge, and that qualifies for tax relief, too.

In our conversations with IT and technology companies we regularly come up against a belief that they won't qualify

In our conversations with IT and technology companies we regularly come up against a belief that they won't qualify. There is a temptation for people who do all their work on a computer to assume that computing, in its many forms, cannot possibly be classified as research and development.

Their work doesn't equate in their minds with the more obvious examples of R&D we read about in newspapers — medical research, propulsion and manufacturing for example.

There is a misconception that R&D belongs only to those industries with closer associations to multinational companies and major universities.

With the average value of a single R&D tax relief claim among software developers being £56,000, this is an expensive mistake.

If you're not sure what an IT firm could claim for, here's a steer:

• Creating tools to extend functionality of software apps or operating systems;
• Developing new data management techniques;
• Designing innovative new methods of capturing, transmitting, manipulating and protecting data;
• Building new software development tools, such as image processing tools;
• Creating entirely new software for new projects.

We found that tech and IT firms spent an average of £194,942 on their innovations over the last two years and the highest SME tax relief claim we've ever overseen in this space was worth £112,000.

This was claimed by a multi-channel platform provider based in London, which specialised in rewards and benefits programmes. The tax credit was claimed for work the company did developing a bespoke platform for managing social media content.

The lesson? Ten years ago some of the finest business minds in the country were getting anxious that R&D tax credits were going to be scrapped by the government as some felt the regime was too complex.

It survived as a straightforward mechanism for companies to reward their innovation so it's a mystery why thousands of IT and tech firms still do not claim. The industry must avoid giving the impression it's not interested or it could once again become a case of use it or lose it.

Mark Tighe is CEO of specialist tax consultancy Catax. He can be contacted directly via the Catax website