R&D Tax Relief for Software Development

“The tax relief benefit is surely marginal – what sort of Return On Investment can I expect ?”
On a recent assignment for a large software company, for each £1,000 spent investigating and assessing development activities, £200,000 of eligible costs were identified. The value of the equivalent tax relief was £50,000, resulting in a bottom-line cash benefit of £15,000 – for each £1,000 spent ! For SMEs, the return is of course double that.

"Isn't the benefit only available to small companies ?"
No. When the scheme was first introduced it was only available to SMEs, but it is now available to all companies."

“What is the definition of an SME (Small or Medium Sized Enterprise) ?”
The Revenue’s definition of an SME is the same as the European Commission’s, i.e. an SME is a company with fewer than 250 employees and either turnover not exceeding €50M or a balance sheet totalling less than €43M, and which is not part of a larger business which would fail these tests. A company exceeding one or more of these limits is considered to be a Large Company.

“Our work is mostly funded by our customers; surely we can only claim that work is R&D if we are funding it ourselves ?”
Not at all. It’s the nature of the work which counts, not the payment arrangements. If the work is eligible and you pay corporation tax then you can claim the relief or credit. You can of course take advantage of this to make your pricing correspondingly more competitive. An exception to this is if the customer is an SME, in which case they will be able to claim the relief.

“Can we claim for the costs of eligible work which we subcontract to other organisations ?”
It depends on the nature of the supplier organisation. If they can themselves claim the relief or credit, then the customer cannot do so. But if you subcontract eligible work to universities or recognised research organisations (or other bodies which do not themselves pay corporation tax) then yes you can claim the relief or credit.

“Is it a tax relief or a tax credit ?”
The scheme was initially only for Small and Medium size Enterprises, and could be paid as a tax credit if there was insufficient tax payable to cover its value. The later extension to cover large companies does not provide for a credit to be paid, so it is more accurately described as a relief.

“What are the main differences between the SME and Large Company schemes ?”
The headline difference is that SMEs can claim a super-deduction of 50%, whereas large companies can only claim 25%. SMEs must own the IPR on developed products (but see below). SMEs can also have the value of the relief paid.

“Do we have to own the Intellectual Property Rights to any software developed ?”
If you are an SME, then in order to be able to claim the 50% super-deduction, you do need to own the IPR. For large companies there is no such requirement, and our understanding is that SMEs which will not own the IPR can still claim the relief at the large company rate (25%).

“What costs can be included ?”
The only costs which can be included in a claim are those which directly relate to eligible work. In the case of software development, these are usually predominantly the costs of effort, but they can also include bought-in software packages and “consumables” such as power, heat, light and water.

“What sort of work is eligible ?”
Two main criteria for eligibility are innovation and uncertainty. This can for example include developing novel products, or integrating components in novel ways. It is not enough for products to be novel only as far as the developing company is concerned. This is an area where external knowledgeable expertise is invaluable.

“Do we have to have detailed records of all costs ?”
The more detail there is, the easier it is to construct a claim. Where work is charged directly to a customer then there will normally be project costings available. We have, however, constructed successful claims (e.g. for product development) where there was no directly funding customer and where only payroll costs were available.