Does your software company qualify for R&D tax credits
As a technological innovator, thinking about government help may not be your number one priority, but it should certainly be on your radar. Research and development is an essential part of creating new technology, and has been recognised as such by HMRC with the introduction of R & D tax credits.
Corporation Tax Relief
To qualify for R & D tax credits, software development companies need to prove that they are spending time and money trying to overcome scientific and/or technological issues, in order to grow their own business. In the process, this should benefit science and technology as a whole, which is of national interest.
HMRC have left definitions in this area intentionally vague; this is designed to encourage as many tech companies as possible to apply for relief, which operates as part of the Corporation Tax scheme. The scheme offers a very significant rebate of 26% on R & D expenditure in successful companies, and up to 33% in struggling businesses.
The issue of success and failure is important here. Unlike other government assistance, your company does not have to show that it is turning a profit. By its very nature, R & D is concerned with overcoming difficulties; these difficulties may very well mean that your company loses money in the process.
Even if you spend time and money on R & D projects which “fail,” this is proof that your company is genuinely seeking innovative solutions to problems. It might seem counter intuitive, but a well-documented timeline of an unsuccessful venture could well qualify for a recovery of up to one third of R & D expenditure.
Old and New
In terms of this scheme, ‘innovative’ does not have to mean ‘new.’ To qualify for R & D tax credits, software development schemes could well be old; again, this is evidence that a particular problem is very difficult to overcome, and that your company has made a serious attempt at resolving this.
Any advances in science and/or technology your company achieves do not have to be the result of brand new projects. It may be that you have taken on schemes which have been attempted before, either by your own company or others, and made them part of a new package of your R & D effort to complete, or at least take further, the innovations in question.
To encourage applications for the scheme, HMRC has an Advanced Assurance process designed to help smaller companies, or those who have not previously applied for R & D tax relief. This examines your company’s forecasts for R & D over the first three years of a project.
When HMRC have examined your application, they will inform you in advance whether your project qualifies for the R & D tax credits scheme, and therefore how much this will save you. This gives you confidence to proceed with your innovative venture, in the knowledge that you have three years of supported, original R & D work.