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UK IT sector missing out on £280m worth of R&D tax relief

The complex submission process is deterring a lot of smaller companies from making claims

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The software and IT sector in Britain is missing out on £280 million worth of R&D tax relief, because the HMRC guidelines for submissions are so complex and contradictory that many companies are being put off from making claims.

According to research and development tax credit specialist Jumpstart UK, this money could dramatically alter the sector's business advantage in a “brutally competitive” global market.

The amount of unclaimed tax credit is calculated by comparing the UK with Canada, which is seen as a saturated market for companies making claims. In order to reach the same saturation levels as Canada, the UK would have to lift its claim levels from the current £1.1 billion to £3.9 billion per annum. This is a shortfall of £2.8 billion for all sectors in the UK.

Taking IT and software as 10% of this, the sector is losing out on a minimum of £280 million a year, according to Jumpstart. Separate studies of the SME market in Scotland and the variances in different sectors and in different regions back this up as a prudent estimate.

Jumpstart calculates that an average initial claim size is likely to be in the region of £97,000 per company. In order to make a claim, however, companies have to understand the technology and how it has been developed in relation to what else is being developed in the marketplace, as well as the legislation and how that development might be interpreted.

Brian Williamson, managing director at Jumpstart, said that most companies understand the technology but not the legislation, and will therefore to go to their accountants for help and support with what is perceived to be a tax submission.

However, most accountants do not understand the technology, and they are generalists understanding only a little about the real subtleties of the legislation. The result is either no claims are made or, if they are, they are very prudent ones.

“Cash starved businesses are very happy to recover a few thousand pounds and have a 'thankful for small mercies' approach. However they do not appreciate just how much they are missing out,” Williamson told Techworld.

“The IT and software sectors above all other sectors have the largest opportunity to access this opportunity because they are often beyond the level of technical understanding by the financial world.”

He added that the UK is a strong market for new technology and design, with a sophisticated consumer base, making it an excellent test bed for ICT companies. The software industry has been responsible for some of Britain's greatest successes in a global arena and it is important for this to be encouraged and rewarded.

“The government is keen to support innovation and the cash and credits available through its R&D schemes could make a significant difference. But it is important for companies to be guided through the submission process by professionals, in order to virtually guarantee their chances of success.”

Commenting on the news, Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants (ACCA), said that small business in particular struggle to get their heads around the process of applying for R&D tax credits.

“You have to produce a lot of documentation to justify why it's innovative. It it a difficult area for small businesses,” he said.

“The government is positively encouraging the tech sector to innovate, and clearly anything that will bring down costs for such businesses has to be welcomed.”



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