A tax that makes everyone happy: R&D tax credits

By: Rory MccGwire

Date: 4 September 2012

Tax credits{{}}“Sounds too good to be true,” I thought to myself, as my friend raved about the cash payment he had just received back from HMRC. Did any of his work really qualify as ‘research and development’?

Six months later my company has just received a hefty R&D tax credit payment of its own. And the nicest thing about the whole process has been that everyone involved has enjoyed themselves.

The breakthrough was the involvement of Terry Toms, who is one of life’s good guys. He specialises in R&D tax credits for software and for the websites that use lots of brand new code. On behalf of Intellect, the UK’s ICT trade body, he helped train HMRC inspectors in how to deal with software claims.

Terry was all smiles once I’d spent half an hour describing the ‘back end’ of our Donut websites, which have more unique functionality than any of its users will ever know. “This should definitely qualify”, he beamed, as he referenced the specific tax clauses under which it was eligible.

Put simply, it qualified because there was no suitable solution available in the marketplace so we had had to create our own technology through a painful process of develop, test and refine. Luckily, we keep timesheets for every employee in the company, and of course we have all our supplier invoices, so we were able to construct an accurate estimate of all the work that had gone into this R&D.

I also called up the R&D Tax Credit Unit at HMRC and queried some timing issues. They could not have been more helpful. From start to finish, I felt they were on my side. Whereas the HMRC website acts as a barrier (the required ‘advance in overall knowledge or capability in a field of science or technology’ makes it sound as if you have to be discovering the next Higgs boson particle to qualify), the R&D Unit clearly wants businesses to succeed in claiming this valuable reward for undertaking unique development work. The speed at which they processed our claim and put the money into our account could almost be described as indecent haste.

The last part of the puzzle was the tax calculations, which our auditor did before submitting the claim on our behalf. To this day I don’t quite understand all the figures they set out for HMRC in the document, but again there was that element of enjoyment. Rob Chedzoy at Milsted Langdon has done dozens of these R&D claims and enthused that it was one of the best parts of his job.

So there you go. If you have gone through the pain, uncertainty and expense of having to develop any kind of new technology — which usually means software code these days — you probably qualify for a tax credit. And if you pay no tax because you are not profitable, which goes in hand in hand with having just invested in something new, you can claim a smaller amount of cash back.

Lastly, two words of warning.

Firstly, few professional advisers are experts in this area and you may well be told that your expenditure does not qualify when in fact it does.

Secondly, the specialist ‘professional adviser’ sharks are out there. Not everyone is like Terry Toms, who charged me a fair price for one day of work and who capped his fee from the outset. A lot of companies are being ripped off with greedy percentage-of-money-received fees and three year tie-ins. The latter mean that once you realise how easy it is to make the claim yourself, you are still obliged to use the consultant and to pay their exorbitant fees for years to come.  Is such a tie-in enforceable? That’s a topic that James Townsend has covered in a Law Donut blog.

Terry Toms runs www.randdtax.co.uk

Rob Chedzoy is a Tax Partner at Milsted Langdon

A full set of HMRC information is here. You can call your local HMRC R&D Unit on these numbers.

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