R&D Tax Credit

[JudgeDread]

Hi,

I am trying to work out our numbers for the R&D tax credit for 2011.

As a small software company it seems like almost everything we do applies.
I was under the impression that work we do as services would not be covered but that does not appear to be the case, as the revenue document clearly states you do not have to be the intellectual property owner of the R&D.

I have asked around friends in other companies as to how they calculate it and the answers range from they claim every penny of payroll expenditure (which seems wrong of course) to they don't claim at all for fear of an audit.

Has anyone any experience of this?

 

[mandelbrot]

I've got a lot of experience with this area - not claiming a credit as valuable as that for fear of being audited, is just nuts.

However, they might be the safer ones....

My understanding of the area is that there is very little qualifying R&D involved in software development - developing software doesn't generally involve resolving a technological / scientific uncertainty, advancing the overall knowledge or capability in the field...

Generally at the outset of a software development project you know what it is you want to achieve and, more importantly, that it is achievable. How exactly you get there is the uncertainty, but that's not the same thing.

 

[JudgeDread]

Actually, I don't think thats the case.

The revenue document states:
Experimental development means, "work undertaken which draws on scientific or technical knowledge or practical experience for the purpose of achieving technological advancement and which is directed at producing new, or improving existing, materials, products, devices, processes, systems or services including incremental improvements thereto".

So software does comply with that, in fact almost all software does.

Also it says:

A scientific or technological uncertainty may exist for one company although a competitor has resolved that uncertainty but retained the resulting knowledge as a trade secret or proprietary information.

The OECD Frascati Manual states “for software development to be classified as R&D, its completion must be dependent on the development of a scientific and/or technical advance, and the aim of the project must be resolution of a scientific and/or technical uncertainty on a systematic basis.

Also revenue state: Almost any software developed for sale is developed systematically and the uncertainties are systematically resolved (i.e., Technical Content).

So the only real question about our projects is whether there is a technology advancement but it does say above that you can advance in a way that is similar to a
competing product, so long as its not reasonably available elsewhere. So making a
product, even one that has competitors, but you don't have access to the source code
, would be acceptable under that criteria.

So while you can't claim for a website you built, as its outcome is not in doubt, you could for building a software component that you are not sure can be completed.

 

[mandelbrot]

Sorry, I'm not convinced! And more importantly I don't think Revenue would be either in an audit situation. Audits and enquiries in relation to R&D tax credit claims will continue to increase, due to the value of the credit (particularly since it's a payable credit), and as the number & value of claims increase.

This is an area that really requires proper professional assistance if you're going to be claiming - to ensure that your claim is maximised on the one hand, and defensible and properly documented in the event of audit on the other hand.

Interesting article from KPMG here, who seem to be targeting this niche area... http://www.kpmg.com/IE/en/IssuesAnd...ent/RDTaxCreditsFlyerSoftwareElectronics2.pdf

 

[Paddy199]

I have a software client and claim the R&D for them. Revenue asked us last year to send in the backup and they had no problem with it.

Just list the P&L items and allocate a % of it that is not R&D. We disallowed very little and Revenue were happy enough with it.

 

[mandelbrot]

I have a software client and claim the R&D for them. Revenue asked us last year to send in the backup and they had no problem with it.

Just list the P&L items and allocate a % of it that is not R&D. We disallowed very little and Revenue were happy enough with it.

AFAIK Revenue staff don't generally attempt to form a decision on the "Science test" requirements, unless the claim is clearly spurious (eg. a carpenter who performed "R&D" on a new technique for hammering nails...!).

The likelihood is they just looked at the computational elements of the claim by reference to the material explaining what activities were included as R&D, and the bases of apportionment.

That doesn't mean that a Revenue appointed technical expert in an R&D credit audit wouldn't disallow a substantial chunk of the activity as R&D.

 

[Paddy199]

There is no ambiguity in the R&D claims I handle. As with all Revenue audits, Revenue will always challenge so you must be able to demonstrate the R&D element.

I think the original question was how to calculate it, not if he qualifies.

 

[JudgeDread]

There is no ambiguity in the R&D claims I handle. As with all Revenue audits, Revenue will always challenge so you must be able to demonstrate the R&D element.

I think the original question was how to calculate it, not if he qualifies.

Hi Paddy,

Thanks for the answers.

I guess that where my problem lies, with software development, almost every project has some element of experimental development, and with the type of work we do there is mostly a doubt over the possibility of completing in the project as set out.

Its seems its a matter of having built the case. Its not really an accounting issue, the numbers are easy enough. I am just scared by the big number I am arriving at.

 

[JudgeDread]

I have a software client and claim the R&D for them. Revenue asked us last year to send in the backup and they had no problem with it.

Just list the P&L items and allocate a % of it that is not R&D. We disallowed very little and Revenue were happy enough with it.

Hi Paddy,

Do you mind letting me know, what sort of % of the companies salaries was claimed as R&D? Roughly speaking.

 

[mandelbrot]

Hi Paddy,

Do you mind letting me know, what sort of % of the companies salaries was claimed as R&D? Roughly speaking.

That's a nonsense question and a surefire way to get yourself in trouble!

You have to decide which activities specifically were R&D and claim the specific amount of the salaries that related to that work. And if you look at pages 27-28 you'll see what records you'll need to have to support your claim.

You're 1 post away from being able to send/receive PMs by the way..!

 

[JudgeDread]

That's a nonsense question and a surefire way to get yourself in trouble!

You have to decide which activities specifically were R&D and claim the specific amount of the salaries that related to that work. And if you look at pages 27-28 you'll see what records you'll need to have to support your claim.

You're 1 post away from being able to send/receive PMs by the way..!

Hi Mandelbrot,

I don't think it is a nonsense question, we turn over about 700 to 800 k and having gone through the paperwork and calculations the R&D amount is running at about 350k.

Its simply that this seems to be a very high percentage to me. In previous years I didn't really understand the R&D tax credit I am sure I have significantly under claimed.

We have several projects where experimental development took place, along with doubt as to the outcome. I know the advancement we sought, and I have time sheets and project reports throughout. However, I hadn't, previous to this year, seen some of these as included.

From talking to people about it I have found people completely ripping the credit off and others not claiming, thinking its only for bigger companies.

 

[mandelbrot]

Hi Mandelbrot,

I don't think it is a nonsense question, we turn over about 700 to 800 k and having gone through the paperwork and calculations the R&D amount is running at about 350k.

Its simply that this seems to be a very high percentage to me. In previous years I didn't really understand the R&D tax credit I am sure I have significantly under claimed.

We have several projects where experimental development took place, along with doubt as to the outcome. I know the advancement we sought, and I have time sheets and project reports throughout. However, I hadn't, previous to this year, seen some of these as included.

From talking to people about it I have found people completely ripping the credit off and others not claiming, thinking its only for bigger companies.

Oh, looks like I was wrong about PMs kicking in at ten posts, apologies.

All I can say to you is that Revenue are very active in this area and will become increasingly so. I'd strongly recommend getting professional advice in this area before claiming, so that you'll have some degree of comfort about your claim.

TBH if your current accountant/tax advisor hasn't the expertise to deal with it for you and been pushing to help you claim a very valuable credit, then you've probably got the wrong accountant.

And for the record I don't work in practice, so I'm not trying to tout for your business. I'd just be concerned that you start claiming a couple of hundred grand p.a. and when Revenue get around to examining your claims, and they will, that you could end up with an awful headache.

EDIT: the reason I said it was a nonsense question is because no 2 companies claims will be alike - R&D would be an area where every case is looked at on its own merits.

 

[Paddy199]

Agree with mandlebrot. Get an tax adviser with experience in this area to do the claim. The credit is there for genuine claims - make sure you get it if you are entitled to it.

 

[T McGibney]

TBH if your current accountant/tax advisor hasn't the expertise to deal with it for you and been pushing to help you claim a very valuable credit, then you've probably got the wrong accountant.

... or you (and your accountant) may need to engage a specialist consultant to advise, or provide a second opinion, on the R&D credit claim. Even if your accountant is vastly experienced and highly confident on this topic, this is still a prudent option. It will cost a bit, but this should be small in the context of the value of the claim.

 

[mandelbrot]

... or you (and your accountant) may need to engage a specialist consultant to advise, or provide a second opinion, on the R&D credit claim. Even if your accountant is vastly experienced and highly confident on this topic, this is still a prudent option. It will cost a bit, but this should be small in the context of the value of the claim.

Good point, thanks Tommy - but even if if the accountant doesn't feel competent/confident to compile the claim, they still should be suggesting it to the OP!

 

[selfassessed]

My understanding of the area is that there is very little qualifying R&D involved in software development - developing software doesn't generally involve resolving a technological / scientific uncertainty, advancing the overall knowledge or capability in the field...

I'm sorry, but that's a silly generalisation. Of course software development does pass the science test in a great many cases and is filled with as much risk and uncertainty as any other development process.

If Google developed a new search engine would you disallow a tax credit claim because it is written in software?

If Ford develops a new engine management system for cars that halves CO2 emissions but uses firmware to do it is that disallowed too?

Generally at the outset of a software development project you know what it is you want to achieve and, more importantly, that it is achievable. How exactly you get there is the uncertainty, but that's not the same thing.

You do know what you want to achieve but not that it can be achieved. I don't know if it is possible to create an algorithm to solve a specific problem until I try. I don't see that as being any different from creating a new cancer treatment drug.

 

[mandelbrot]

I'm sorry, but that's a silly generalisation. Of course software development does pass the science test in a great many cases and is filled with as much risk and uncertainty as any other development process.

If Google developed a new search engine would you disallow a tax credit claim because it is written in software?

If Ford develops a new engine management system for cars that halves CO2 emissions but uses firmware to do it is that disallowed too?

You do know what you want to achieve but not that it can be achieved. I don't know if it is possible to create an algorithm to solve a specific problem until I try. I don't see that as being any different from creating a new cancer treatment drug.

I don't think I was clear enough in what I said earlier, what I meant was that in software development while there may be an element of R&D, only a relatively small proportion of the overall activity is actually novel R&D - as you say finding the new algorithm would be R&D, but then wrapping that up in your piece of software is largely not R&D.

 

[selfassessed]

I don't think I was clear enough in what I said earlier, what I meant was that in software development while there may be an element of R&D, only a relatively small proportion of the overall activity is actually novel R&D - as you say finding the new algorithm would be R&D, but then wrapping that up in your piece of software is largely not R&D.

But you could say that about any R&D activity. My understanding is the R&D tax credit is project based not task based. i.e. you don't simply isolate one or two small tasks that are novel - you include the whole project.

 

[mandelbrot]

But you could say that about any R&D activity. My understanding is the R&D tax credit is project based not task based. i.e. you don't simply isolate one or two small tasks that are novel - you include the whole project.

It is project based, but not necessarily 100% of a software development project will qualify - there would/should generally be an apportionment.

 

[T McGibney]

It is project based, but not necessarily 100% of a software development project will qualify - there would/should generally be an apportionment.

This confuses me. Either the project is an R&D project or it's not, even if it includes some run-of-the-mill tasks. I don't understand the 'apportionment' argument and I haven't heard it raised before by experts on this topic. I hope Revenue aren't trying to move the goalposts on this useful tax credit.