What brings these in scope of R&D for tax purposes is a system uncertainty that isn’t readily deductible, can’t be solved through widely available plugins or where the answer can’t be given by open-source or developer online communities.
At the heart of it, R&D for tax purposes needs to satisfy two core tests:
R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology, for example:
Critically in the software space, demonstrating a clear understanding of what is the current known technologies, i.e. the baseline, is fundamental. As the software space continues to evolve at a rapid speed, technical assessment of projects needs to be real-time.
At a top level there are five distinct areas which R&D claims apply to in SaaS; staff costs, subcontractors, externally provided works (EPWs), software, consumables e.g. heat, light and power. This data is used extensively in your R&D claim, find out more about each type below.
The majority of most R&D tax relief claims are based around staff costs. This includes people directly involved with the activity and others who are indirectly involved.
An example of direct costs would be a specific solutions architect – they tend to be defined, technical roles who are the doers of the project. A common misconception is they have to be scientists and academics, this is incorrect. If they are directly contributing to the R&D effort, then there is a good chance their costs can be included.
Indirect staff are people who are also involved in supporting the R&D project such as administration, finance, and personnel activities where they enable the R&D to happen. These costs are usually overlooked but have a rightful place in the claim.
Where you may not have the expertise in house, you may rely on a third party to help with part of the R&D process. These costs are qualifying expenses for the R&D tax relief scheme. For overseas subcontractor costs new rules apply for accounting periods starting on or after 1 April 2024.
Like subcontractors, you may not have directly employed staff but want to have resource for a particular role who act in the same way as employees – i.e. under your care custody and control. These costs can form part of the claim. For overseas EPW’s costs new rules apply for accounting periods starting on or after 1 April 2024.
The proportion of heat, light and power that is used for the R&D project is also qualifying expenditure.
Any software used directly in the R&D is a qualifying cost. For accounting periods on or after 1 April 2023 costs related to datasets and cloud computing can also be claimed.
The SME and RDEC schemes will merge into a single scheme for accounting periods starting on or after 1 April 2024.
With the SME R&D tax credit scheme you can currently claim tax relief of up to 33% on your qualifying R&D expenditure incurred up to 31 March 2023. After this new rates will apply.
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The Research and Development Expenditure Credit (RDEC) rate has increased over the years, companies can get over 10% of their R&D expenditure incurred up to 31 March 2023 refunded. Then this will increase up to 15%.
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We worked with a PE backed SaaS business who had previously claimed R&D tax relief but hadn’t used an external advisor. Being concerned about the changes in the R&D tax relief schemes, we worked with the business to reset their data capture process and interviewing to give time back to the senior development team. We were able to craft a technical report that reduced the risk of an HMRC enquiry.
Source Advisors worked with a start-up SaaS business that understood their technology to be new to the market. We researched what current technologies existed, what information was publicly available and how confident they could be in making an R&D claim. From this work, we identified that it was a more crowded space than first thought but were able to identify a key difference that was also, possibly, a patentable feature.
