Monthly Tax Idea – July 2011

Financial services and e-commerce amongst businesses missing out on R&D tax relief

Many businesses, especially in the financial services and e-commerce sectors, are missing out on R&D tax credits which could save many thousands of pounds of tax a year.

Companies undertaking qualifying research and development can benefit from enhanced tax relief of 200% on the qualifying costs following EU state aid approval. For a company paying corporation tax at the main rate of 26%, this means the tax relief is effectively equal to over half of the qualifying cost. If the company is loss making, a cash repayment of up to 25% of the qualifying spend can be claimed instead.

Many businesses overlook the possibility of R&D tax relief claims in the development of internal use software or online customer interfaces thinking that only the creation of entirely new software products qualifies. In fact the development of algorithms in financial systems and risk modelling or in e-commerce customer interfaces should qualify. Typically, this type of development is undertaken by companies in the financial services sector (banks, insurers, insurance brokers, actuaries, investment management and hedge fund sectors for example) or in e-commerce (online betting, gaming, retailing etc).

The issue of such R&D tax relief claims on what is effectively internal use software has been raised in the current consultation document. Initially it was suggested that these should be excluded from the relief in the future. This possibility however appears to have receded. However in any event any business which has undertaken development in this area should examine making a claim as soon as possible, because of normal claim deadlines.

For more information contact: Lindsay Pentelow or James Boughton.