Businesses in the South are missing out on thousands of pounds’ worth of tax breaks for research & development (R&D), it emerged today.
Urgent action is required to lodge claims before the financial year-end, which can potentially mean cash back to help with the bottom line.
The alert comes from Rebecca Combes, pictured, tax director at the South Coast office of Smith & Williamson, the accountancy and investment management firm.
She said local businesses are missing out on valuable R&D tax breaks on the development of their IT systems, which could be worth many thousands of pounds.
Qualifying businesses can come from any sector. There are specific costs and activities which qualify for the tax break, and one of these often overlooked is software R&D.
Rebecca, based in Southampton, said: “This is particularly relevant just now because many companies have a financial year end of 31 March. If corporate businesses organise their R&D claims before then, they can reduce their tax charge, or, if not in profit for the year, can potentially get cash back and so immediately boost their bottom line.
“Many businesses are developing software to enhance their offering to clients, and the cost is frequently eligible for R&D enhanced tax relief.
“We are finding that many organisations are simply unaware of the potential and are leaving money on the table.
“Successful claims could, for example, relate to the development of IT systems for use within the business itself, internet security, migration of systems to the internet, building IT functionality for clients’ own adaptation and the various interaction between systems.”
The R&D tax claims can be substantial.
Rebecca explained: “Businesses with up to 500 employees may be eligible for a tax deduction worth 200% (soon to rise to 225%) of qualifying R&D cost.
“So a business paying corporation tax at the marginal rate of 27.5% can receive an extra cash benefit of £340 for every £1,000 of qualifying expense. Moreover, firms may be able to claim relevant expenses incurred in the two previous years – as long as the claim is made on time.”
Businesses with more than 500 employees can obtain a tax deduction of 130% of qualifying expenditure, while loss-making smaller businesses can get special treatment from the taxman.
In broad terms, they may be able to ‘surrender’ their losses for 25% of their qualifying R&D – even if they have never paid corporation tax.
The potential for R&D tax claims on IT development arises as software is specifically recognised by the tax authorities as technology, and its development is often difficult and uncertain.
Rebecca said: “The resolution of a technological uncertainty in respect of software is just what R&D relief is about.
“If your staff are competent professionals working in the field, and they consider their development assignments to be uncertain as to whether or how results can be achieved, then you should look into the potential for an R&D tax claim.
“It doesn’t matter if competitors of your business have already found a solution, providing they have not made their discoveries public.
“At a time when many businesses are struggling, these R&D tax breaks could be supremely helpful.”
The government has been keen to promote the use of R&D tax breaks by companies to develop the UK’s credentials as a knowledge-based economy, so valid claims in this area should receive a positive response, she said.
