BEST PRACTICE GUIDE
ADVISING COMPANIES IN THE INFORMATION TECHNOLOGY (IT) SECTOR
ABOUT RANDD UK
We’re the experts in R&D tax credits and reliefs, with unrivalled knowledge of the industry and the latest legislation to add value for accountants and their clients.
Working alongside accountants and their clients, we use our expertise to help them prepare and submit successful R&D tax claims.
We understand the challenges you and your IT clients face within the R&D tax space, with complex and evolving regulations and newly introduced compliance requirements that can cost you significant time.
Ensuring you and your clients benefit from our industry-leading expertise, we can:
Identify legitimate claims and qualifying expenditure
Prepare and process R&D tax claims
Collate and submit additional information and project descriptions
Manage enquiries and investigations
Through our diverse team of R&D tax specialists, we build outstanding partner relationships and ensure that your clients continue to be incentivised to innovate.
You retain full control and can work with our team to deliver an exceptional R&D tax service to your clients.
IS INFORMATION TECHNOLOGY CLASSED
AS QUALIFYING R&D?
The short answer is that it depends on the project!
To qualify for R&D tax relief, a project must look to address a scientific or technical uncertainty within an industry, so, on the surface, you are in a position to give good news to your IT clients.
So long as your client’s IT project meets the following criteria, your client is likely to be able to submit a qualifying claim:
• Includes qualifying expenditure and your client only claims for this expenditure
• Addresses an uncertainty which cannot be worked out by a professional in the field
• Tries to overcome the uncertainty
• Does not relate to the arts, humanities or social sciences
• Relates to your client’s primary trade
We can work with you to review individual projects and ensure that all claims are compliant with the latest legislation.
THE QUESTION OF SOFTWARE
Software development at the cutting-edge of the sector blurs the lines of what can be classed as qualifying R&D.
It isn’t often clear when software development qualifies for R&D tax relief and when it does not, partially because the scheme employs multiple criteria in its definition of R&D, and software often meets some but not all the requirements.
You may have found this leading to clients who submit ineligible claims or those who avoid submitting, when their work qualifies as relevant R&D activity.
The distinctions between qualifying and non-qualifying software development, and relevant qualifying expenditure, are often small and nuanced.
Software development certainly, in broad terms, meets the requirement of projects within science and technology.
However, there is then the requirement that the project must be innovative and contribute to the overall knowledge of a particular subject area by:
Looking for an advance in the field
Overcoming or trying to overcome a scientific or technical uncertainty
Contributing knowledge not already held or easily worked out by another expert in the field
This is where your clients in software development might trip up.
To qualify for R&D tax relief, a software development project must seek to advance the field of computer science, software engineering or a related sector.
It cannot, for example, solve an issue only facing your client’s operations, or apply an existing solution in a new context.
The latest Government guidelines offer two routes for software development to qualify for R&D tax relief:
• To be the end goal of an R&D project
• To be adapted or created to solve a wider uncertainty
If a project clearly addresses or solves an uncertainty within the software development or computer science sectors, whether it is intended to be sold or not, then it will likely qualify for R&D tax reliefs.
Alternatively, a software development project might be part of a wider R&D effort.
The development may qualify as part of the R&D project if it adapts or creates a software or digital tool solely for use within that project, which in turn must address a scientific or technological challenge.
Additionally, for the first time, cloud computing and data costs are explicitly classed as qualifying expenses for R&D tax relief claims.
Under these circumstances, your client may be able to submit a claim if they can demonstrate sufficiently that the development makes a genuine qualifying contribution to the wider field.
This concept is not well understood in industry, so you will need to communicate this thoroughly to clients seeking to claim R&D tax relief for software development.
This communication is the core of best practice when advising IT clients while maintaining integrity, to give your clients faith in each claim submission.
IS IT CONTRACTED OUT?
With many R&D projects now being carried out by both the controlling business and contracted support, it’s important that your clients understand their rights and obligations when claiming tax relief for R&D work.
In line with the latest guidance released by the Government in March 2024, the new regulations refer to ‘contracted’ R&D as activities undertaken by a ‘contractor’ on behalf of a ‘customer’, replacing the term ‘subcontracted’ under previous legislation.
Under the latest rules, contracted R&D costs are eligible for R&D tax relief.
For the first time, R&D tax regulations explicitly give the right to claim to the customer, the party which bears the financial risk for the project.
The merged scheme also effectively puts an end to the concept of ‘subsidised’ R&D from a contractor/ customer perspective – as well as removing relief restrictions on subsidised R&D expenditure.
IS YOUR CLIENT THE CONTRACTOR OR CUSTOMER?
This is the core of the issue which many accountants face when working out the most appropriate way to advise IT clients on R&D tax relief claims and establishing eligibility.
In some instances, it will be clear which party has contracted out their R&D activities (i.e. the customer), but some commercial relationships can obscure these definitions.
To approach this scenario with integrity and provide the most straightforward service to you and your clients, we would consider several factors that we know HMRC pays attention to when assessing claims:
• Intention – Any R&D carried out must be explicitly intended within the contract or agreement, or else the contracted party may argue that they have carried out the R&D themselves.
• Risk – The uncertainty of R&D makes investing it in an inherent risk, particularly financially, so the party which finances the project is typically considered to be the contracting party.
• Property – The intellectual property for the R&D project usually belongs to the contracting party.
Advising IT clients on R&D tax relief can be difficult for this reason, since their expertise may be used to identify where R&D needs to take place, despite nominally being the contractor.
ADVISING THE CONTRACTING PARTY
New legislation has clarified the circumstances under which contracting parties have the right to claim for R&D activity carried out by a contractor.
There must be:
• A written or verbal contractual agreement
• R&D undertaken
There must also be a “reasonable assumption” that the customer “intended or contemplated” that R&D would be required to fulfil the terms of the contract.
The purpose of this clause is to make it clear that R&D has been purposefully contracted out and has not been carried out incidentally by the contractor.
In its latest guidance, the Government takes a holistic view which might come across as a surprise to your clients.
It states that clauses requiring a ‘reasonable assumption’ that R&D was intended under the contract are not necessarily satisfied by contracts alone, nor do contracts which do satisfy these clauses need to explicitly state that R&D is needed.
The best way for you and your clients to demonstrate intentionality is to ensure that the ‘contracted’ nature of the R&D activity is made clear at every stage and that evidence of this communication is kept, readily available.
Ownership and intention are particularly significant under the merged scheme, as these factors help to determine the contracting party in more complex commercial relationships, ensuring that the party bearing the risk maximises the incentive they receive to innovate.