In the ever-evolving world of software and information and communication technology (ICT), companies often engage in research and development (R&D) activities to push the boundaries of innovation and stay ahead in the competitive market.
R&D tax relief is a valuable incentive designed to encourage companies to invest in R&D projects, fostering growth and technological progress. However, not all projects in the software/ICT sector qualify for this relief.
Here we aim to share some (fictional) examples illustrating how and why HMRC might seek to deny R&D tax relief claims. Each example uses real-life HMRC potential challenges that have been raised by HMRC Inspectors in formal enquiries, as highlighted in a recent article by the R&D Community (a community for R&D tax advisors).
"The project lacks technological advancement."
Example: A company working in the software/ICT sector submits a claim for R&D tax relief for their latest project, which involves creating a basic e-commerce platform that utilises existing open-source technologies and common software development practices. HMRC denies the claim as the project does not demonstrate any technological advancement, as it only uses well-established technologies and does not involve any significant improvements or innovations.
"The R&D activities are routine design and development."
Example: A software development firm claims R&D tax relief for the creation of a custom content management system for a client. While the system has unique features tailored to the client's specific needs, the design and development activities involve routine coding practices, standard database management, and widely-used programming languages. HMRC denies the claim because the work constitutes routine design and development rather than groundbreaking R&D activities.
"There is no evidence of technical uncertainties."
Example: An ICT company claims R&D tax relief for the development of a new mobile application that simplifies food delivery and integrates with popular payment gateways. The company states that they have used widely-accepted programming languages and frameworks, and they have followed established guidelines for mobile app development. HMRC denies the claim as there is no evidence of technical uncertainties, meaning the project did not involve overcoming any technological challenges or require innovative solutions.
"The project is based on a commercial, rather than a technological, innovation."
Example: A software startup submits a claim for R&D tax relief for the development of a new subscription-based online platform for renting bicycles in urban areas. While the platform features an innovative business model and offers a seamless user experience, the underlying technology is based on existing GPS tracking, mapping, and payment processing solutions. HMRC denies the claim as the project focuses on commercial innovation, rather than technological advancements.
"The claimed R&D activities are not clearly distinguished from non-qualifying activities."
Example: A software company claims R&D tax relief for a project that involves both the development of a new machine learning algorithm and the creation of a user-friendly interface for the end product. However, the company does not provide sufficient documentation to differentiate the R&D activities (the machine learning algorithm) from the non-qualifying activities (the user interface design). HMRC denies the claim because the company has failed to clearly distinguish between qualifying and non-qualifying activities.
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