Research & Development relief

[simpsonite]

Hi all,
My client is a small IT Consultancy Company.
They have developed a new piece of software that can control a specific camera form anywhere in a sports stadium & send the footage back to the computer wirelessly.

They have commissioned a University to develop the software & have currently spent £5000 in their last accounts for the first basic stage of the software to be written. My client will pay for upgrades as & when needed & are in the process of applying for an innovation grant to ease further costs.

My queries are -
1) Is the initial £5000 to be capitalised or can we treat it as Revenue expenditure on research & development?

2) If its capitalised then its only eligible for 100% fya where as is if its Revenue expenditure then we can cliam 225% of the £5000 as further R & D relief?
Why the favourable treatment for Revenue over Capital Intellectual Property?

3) If we could argue that it is Revenue expenditure & the Company has insufficent profits to utilise, then how in practice does the company surrender the R & D tax relief in exchange for a tax credit?

Any thoughts on the above from any one who has practical knowledge of this would be much appreciated.

regards,

simpsonite

[Lambs]

S,

HMRC used to take a dim view of R&D for software, thinking that the outcome could be predictable therefore none of the required technological uncertainty.

But they have been convinced more recently as regards system uncertainty and it is often easier now to claim - quite common, in fact.They do have specific guidance on software and when I get back later on I shall post the link.

Likewise re: capitalisation of expenditure - while in theory relevant only to revenue expenditure, it is possible to capitalise in the accounts but still make a valid claim - see HMRC CIRD Manuals 81700 & 99100.

Critical to your claim will be establishing the technological uncertainty that couldn't be resolved simply by hiring a suitably qualified competent professional. If you can do that then there is a basis for claim.

Regards,

Lambs

[simpsonite]

Hi Lambs,

thanks for your input,

look forward to your link later,

regards,

simpsonite

[Lambs]

S,

http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD81960.htm

However, on reading your post more carefully, now that I am no longer in a busy café, (and well done TW for automatically adding the acute accent!), I can see that you refer to the expenditure being incurred by paying a university to do the work, rather than your client's own employees?

See CIRD84200 for sub-contracted activities and the corresponding restriction in eligible expenditure.

Note also that normal grants reduce eligibility for R&D £ for £, but notifiable State Aid for a project kills an SME claim completely (but note only for that project) - although a claim is potentially still possible under the large company scheme. From memory TSB funding does count as 'notifiable' (although I am not certain) so care is needed here.

If the software is particularly innovative, it may potentially be "patentable" and therefore eligible for Patent Box treatment.

Regards,

Lambs

[R AND D Consulting]

Just to add to what Lambs has said I have a client who recieved a grant from TSB and they are classified as a notified state aid so would remove the chance to claim under the SME R&D scheme.

[simpsonite]

Hi Lambs/ R & D Consulting,

Thanks for your feedback,

I am currently reviewing CIRD81960 regarding Software & R & D claims!!
There is certainly a lot of definition & guidance there to be had, but nothing that tells me conclusively that the software in my particular case qualifies.
I assume its just a case of reviewing the merits of each claim on an individual basis?

Would it be worth writing to the Revenue for clearance in this case. I understand that there are various specialist R & D tax credit units that deal with such claims.

Yes, my client has commissioned a University to write the software.

CIRD84200 states that there would be a restriction for an SME company limited to 65% of the payment.
So in this instance 65% x £5000 -£3250

My client is in the process of applying for an innovation grant so if this is granted then it would appear that a SME R & D claim would in any event be denied or significantly restricted?!

regards,

simpsonite

[R AND D Consulting]

Sadly as the R&D Tax scheme covers a lot of industries and project types it's not really possible for the HMRC to list every single thing which will qualify.

Generally speaking for R&D claims with regards to software it has to have the same scientific or technological uncertainty as any R&D project, which has to be a general uncertainity and not just limited to the company undertaking the work.

The HMRC R&D units are very helpful and if you give one of them a call they may be able to assist, or if you can post some more information about the development undertaken I may be able to tell you if it's likely to qualify, or happy to speak with you on the phone.

With regards to the grant, if it's classified as a notified state aid then they would not be able to claim for any of the project costs under the SME scheme, however they may be able to make a claim under the large company scheme for the costs incurred.

[simpsonite]

Hi,
thanks for the response.
As far as the development of this software is concerned -

Normally when a sports team films a match they will use a metal tripod with a camera on top to film from a height of about 20ft or higher. The camera is normally controlled via some sort of mechanical device attached at the top & at ground level.
My client has commissioned a Universirty to write a piece of software that will control a specific camera from a computer anywhere in the ground and the footage is sent from the camera to the computer via G3 signals so no internet is needed.
The software is a new product & new concept.

I have also emailed my local R & D specialist unit in Cardiff so hopefully they can provide a definitive response.
r

[simpsonite]

Thnaks all for your input & help with regards to this matter.
I have now had a detailed repsonse from my local R & D specialist unit in Cardiff who were most helpful.

regards,

simpsonite

[Lambs]

...although Manchester is the team dedicated to SME claims, I think.

Nevertheless, I have generally found all R&D teams to be helpful.

Please do also look into whether or not you might be able to patent the device/software. I am no expert on patents although I am aware of software being written for innovative devices and which has been patented in the past.

The point being that the tax rate on Patent Box profits will fall to just 10% - which could be more valuable than even the very generous R&D tax relief, in the long run.

Regards,

Lambs