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R&D tax credits for Artificial Intelligence (AI) and robotics companies

The artificial intelligence (AI) and robotics sector is by its very nature innovative and relies heavily on R&D activity. A significant amount of this activity will be qualifying activity for research and development tax relief. We recommend that companies identify all of the activities that be included in any claim at the very start of a project.

Whilst HMRC do not have a separate classification for AI and robotics, it is likely that the subject does not sit as a sector vertical but touches any sector that is looking to drive automation and increase productivity. In plain English, these types of development align closely to the R&D tax relief system as the fundamental tests are:

  • An advance in science or technology
  • Scientific or technological uncertainty

A typical claim is likely to include:

  • Software development
  • Hardware and resolving how that hardware interacts with software for the intended use
  • Creating efficiency in a process
  • Testing new materials to create the optimum use of the AI
  • Merging legacy systems into new automation
  • Data analytics tools

The scheme is broad, and it is likely that if you are working on an AI or robotics project or solely focused on this subject, investigating R&D tax credits is a must.

What qualifies for Artificial intelligence and robotics R&D?

There are five broad categories which AI and robotics R&D claims fall into – these are staff costs, subcontractors, externally provided works (EPWs), consumables and heat, light and power. More in-depth discussion on each of these can be found below.

The majority of most R&D tax relief claims are in respect of staff costs. This includes people directly involved with the activity and others who are indirectly involved. An example of direct costs would be a software engineer or a robotics engineer – they tend to be defined technical roles who are the doers of the project. A common misconception is they are scientists and academics, this is incorrect. If they are a competent professional whose expertise is part of the R&D effort, then they should be included.

Indirect staff are people who are also involved in the R&D project such as management, procurement, purchasing etc where they help enable the R&D to happen and also are part of the management of the process. These costs are usually overlooked and can be a big impact on 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 claims are qualifying expenses for the R&D tax relief scheme.

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 form part of the claim.

Any items that are used only for R&D and have no use once the project is completed so consumed by the project is also qualifying expenditure.

When you know how much R&D you are doing, you can then attribute a proportion of your heat, light, power & water to the R&D tax relief claim.

Typical scenarios

Automation of packaging

A client wanted to reduce the reliance on manual handling in the warehouse. Due to the structure of their products, standard machinery was not suitable so they embarked on a project to see if they could get standard machinery to work by amending their process or create bespoke robotics to get an answer.

After almost two years of trials, testing, failed attempts the client achieved what they wanted to – and received an R&D tax credit over £100,000 each year.

Intelligent learning of business intelligence

Our client was a start up software company who had become frustrated with the reliance on teams of people to crunch numbers where they felt that this could be coded and continue to learn based on real life events.

By using a number of standard data feeds then creating the linkages into a singular system, in less than six months our client had a prototype of how this could work. This qualified for R&D and created enough cash flow to help push on to the next phase.

Our client then reinvested that money to employ a small team of engineers to work on the AI. They continue to develop the coding and each year benefit from R&D tax relief.

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