Tax Reductions on Offer for IT Innovators

By David Butler, CEO of Butler Basford and Lord Ltd.

“One of the most far-sighted and constructive pieces of legislation originated by the European Union is the Research and Development Tax Credit system (RDTC). The scheme acts to reward creative and innovative efforts in large and small businesses by lightening their burden of corporate tax. Spend money on developing new concepts and you get a refund of company tax: that’s the deal the RDTC delivers.

In the United Kingdom, there are two RDTC schemes in operation, one for large companies and one for small. A small company is defined as having no more than 500 employees, a turnover not greater than €100m and a balance sheet not greater than €86m. Both schemes are operated by the national tax collecting authority, HMRC. Just to give you an idea of the scale of the claims, the average big company claim is €375,000 while the average small company claim is €50,000. When a company claims for the first time, it’s also allowed to claim for two past years. So these are substantial sums of money.

Many incentive schemes provided by the EU and its member nations involve matching funds: the public purse puts up half the money and the claiming company has to find the other half. The RDTC is different. All the money comes from the public purse. Your company has to put up no money at any stage.

The number of claims made in Britain make interesting reading. In the year 2010/11, large companies made fewer than 2000 claims and small companies made just over 8000. So you can see there are enormous numbers of companies who are not claiming. I often wonder why.

Now comes the critical question. What is meant by ‘research and development’ and how does a company know whether any of its activities would qualify for the RDTC? There is a tendency for people to think of research as what goes on in pharmaceutical companies where new drugs are being developed, or in engineering plants where new alloys are being developed to make cars or aircraft. If your company fits neither of these categories, it’s easy to conclude that the RDTC has no relevance. But please read on. That is far from being the truth.

The RDTC regulations identify all kinds of innovatory work that may qualify for a tax refund. In fact the rules actually indicate two areas which are of great interest to IT professionals. The rules point to systems integration and the improvement of business processes as qualifying areas of endeavour. We know from our case records that lots of IT activities have been the subject of successful claims. A senior manager from an IT firm recently described the RDTC as ‘a game changer for the IT industry’. This is by no means an exaggeration.

The invitation to claim is broad but as you would expect there are plenty of small print conditions. In fact the notes issued by the tax authority in Britain and the accompanying legislative materials amount to several hundred pages. So the people who compile a claim for your company have to know what they’re doing.

The authorities who administer the RDTC in Britain like to emphasise that for a project to qualify, there must be some uncertainty about its outcome. They don’t want to pay out for projects that are devoid of risk. My own observation is that it’s quite normal for IT projects to have an uncertain outcome – it’s the risk-free ones that are exceptional.

Why should a company bother to claim? One reason is that some of its competitors almost certainly are. If they are claiming and you are not, you are making them a gift of a competitive advantage. And it’s a competitive advantage they don’t have to earn, you present it to them on a plate.

The simplest case to tackle is that of a company doing innovative IT work and failing to claim. Specialist advisers like BBL can help such companies make a claim, so there really is no excuse for failing to take advantage of the opportunity.

Many large companies that have a specialist taxation department are already claiming the RDTC. But even for them that’s not necessarily the end of the story. Such companies probably have a considerable number of smaller companies who supply them with goods and services. It is very likely that these suppliers might have a claim which they haven’t made. So the big company that purchases their products and services must orchestrate the claims of the suppliers, get them round a table and work out who can claim what. Then when the suppliers have their refund the big company can start an interesting conversation with the suppliers about the quality and price of what it buys. My colleagues and I call this ‘the food chain’. Suppliers and customers alike can gain.

We are also working with government departments. They of course pay no corporation tax and so have no chance of direct savings. But they often have huge contracts with suppliers. Here too the food chain argument holds good. Government agencies can reduce their procurement costs by helping their suppliers claim RDTC. It makes sense for governments to discriminate in favour of those suppliers who are blazing a trail into the future.

It’s also a good idea to look at the way you structure projects in the future. There are many different ways a project can be structured. Why not organise your future projects so that more of the expenditure falls into the baskets marked ‘Claimable’ and less into the other baskets? You can actually change your ROI criteria, making feasible projects that would otherwise have been out of your reach.

Every day I meet people in the IT world have never even heard of the RDTC, despite the fact that so many IT activities are potential areas for a claim. It’s good to get money back to companies from IT activities. But for me that’s just the starting point. I want to use this situation to enhance the position of IT within enterprises. We have been talking for decades about the need for IT leaders to become business leaders. The RDTC allows IT leaders to become business innovation leaders. I want to hear people in your business saying ‘Who would have thought the guys in IT would have had the business know-how to bring about this situation?’ It’s a massive opportunity that the IT community can’t afford to miss. Feel free to contact me for guidance.

My team’s practical knowledge of the RDTC is of course mainly in respect of the systems operating in the United Kingdom. But if readers from other European countries wish to contact me, I will put them in touch with an appropriate agency in their own country. There is a growing network of RDTC experts across the European Community sharing know-how and expertise.”


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