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Small software firms missing out on tax relief, warns Grant Thornton

Companies failing to understand how much can be classified as R&D

Small UK software developers are missing out on a tax break designed to encourage research and development, according to experts.

Accountancy firm Grant Thornton said companies in the sector are failing to make the most of all the relief available to them, usually because they do not appreciate how much activity can be classified as research and development or "they have unfounded fears about red tape".

Grant Thornton said R&D tax claims it has already dealt with are commonly worth over £50,000 claimed back from HM Revenue & Customs.

The company said that currently 8,350 firms across all industry sectors claim the relief. The vast majority are SMEs, but they account for only 25 percent of the available pot which totals £1 billion per annum.

The lion's share of the relief is currently consumed by larger firms which can claim approximately 8 percent tax benefit for every £1 spent on R&D.

Ian Rowland, North West head of research and development tax at Grant Thornton, said small businesses across the UK can save up to an additional 26 percent in tax for every £1 spent on R&D. From April next year this benefit will rise to up to 31.25 percent.

He said: "The critical test for HMRC is the question of whether a company is advancing knowledge in the sector and is engaged in activity which involves genuine technical uncertainty. Software development of any type has the potential to qualify."

Rowland said "creating new or more efficient procedures", new security or encryption techniques, new search engines or new operating systems or languages can qualify. Technology business areas commonly attracting claims include SaaS, cloud computing, media games, other online systems or CRM, he said.

The tax break is not just limited to product development either. It can also encompass developing more efficient processes to drive cost savings, reduce waste or to overcome the technical challenges created by compliance or regulatory issues. And the R&D work does not need to be successful to qualify.

Flashback: Budget promises to boost technology skills, delivers business tax relief


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