If you’re looking to drive change in your organisation, ๐ฒ๐น๐ฒ๐๐ฎ๐๐ฒ ๐๐ผ๐๐ฟ ๐ฐ๐ต๐ฎ๐ป๐ด๐ฒ ๐ฎ๐ด๐ฒ๐ป๐๐:
๐ Identify them โ look for the people who are most on board with the changes you’re trying to make, the most proactive and unafraid to challenge the status quo.
๐ช Empower them โ give them a seat at the table, involve them in initiatives, elevate their voices. Don’t be afraid to break hierarchy in doing so.
๐ก Support them – protect their time, don’t overload them.
The new leaders in your organisation may already be there
Monthly Archives: August 2024
Can UK Tech still rely on the R&D Tax Relief Scheme?
The UKโs Research and development (R&D) tax relief scheme has long been a vital resource for tech companies, offering substantial tax relief. Created to encourage investment in R&D, the scheme allows small companies to claim back a percentage of their expenditure on qualifying activities. However, the recent crackdown on fraudulent claims, tightening of the claims procedure and additional scrutiny on all claims is raising questions about the effectiveness of the scheme, leading to growing frustration in the tech sector and many to question if itโs becoming more trouble than itโs worth.
Fraud and abuse: a growing concern & increased scrutiny
The scheme has been plagued by issues of fraud and abuse. According to a recent BBC article Errors and Fraud have cost the taxpayer ยฃ4.1bn, and another recent article from Dan Neidle at Tax Policy Associates, states R&D Tax Specialist Green Jellyfish are guilty of ยฃ100m fraudulent claims alone.
The has led HMRC to ramp up its efforts to detect and prevent false claims. They tightened their claims procedure in 2023 and have hired an additional 300 inspectors since 2022.
Within my network at least, it’s clear this is having an impact, with many reporting a significant increase in their claims being questioned, delayed and rejected. It’s caught a lot of organisations on the back foot.
While the crackdown is undoubtedly necessary, it’s also exposed the complexity of the scheme and the subjective nature of the schemeโs requirements, and the increased scrutiny has made it more difficult for companies to navigate the claims process.
The issues with the scheme: complexity and subjectivity
One of the significant issues with the R&D tax relief scheme is the subjective nature of its requirements.
According to the UK Government’s R&D tax relief guidelines, to make a successful claim, a company must demonstrate that their project:
- Looked for an advance in the field.
- Had to overcome scientific or technological uncertainty.
- Tried to overcome this uncertainty.
- Could not be easily worked out by a professional in the field.
What constitutes an “advance in the field”? How significant must the “scientific or technological uncertainty” be? Who qualifies as a “professional in the field”? How hard does something need to be to say it couldn’t be “easily worked out”?
Ah but helpfully, HMRC do have more detailed guidance. Behold CIRD81910, and CIRD81960 for further guidance for software. A quick glance at these documents reveals that they are highly technical and not particularly user-friendly (it appears none of Government Digital Service‘s skilled content designers had a hand in drafting this guidance).
Even with these guidelines, the answer to whether a project qualifies is frequently (as is oft’ the case when you ask a software developer a question), “it depends.” The CIRD81960 guidance for software itself acknowledges these difficulties, and I could write a whole article on the cases for and against the eligibility of software development to be considered R&D, ranging from most of it to very little.
This complexity and subjectivity poses a key risk: differing interpretations between HMRC inspectors, potentially resulting in legitimate claims being unfairly rejected.
Increased burden on companies
Previously, companies could rely heavily on R&D claims specialists to handle much of the work involved in submitting claims. However, with the heightened scrutiny now applied to nearly all submissions, companies are needing to provide far more detailed descriptions of their R&D activities.
While R&D claims specialists can assist with navigating the claims process, they typically lack technical experience and certainly lack the knowledge needed needed to accurately identify which aspects of your software development involve genuine technical uncertainty.
This burden is increasingly falling on the tech teams within organisations, who must now invest significantly more effort into their claims, often resulting in weeks of back-and-forth between technical staff and supporting R&D claims specialists.
Nervously awaiting legal precedents
As many organisations that previously relied on R&D tax relief are finding their claims rejected, it’s pushed some into financial difficulties. Consequently, more are being challenged in court, and these cases are likely to set precedents that will shape future interpretations of what qualifies as R&D.
In the meantime, many other organisations are anxiously awaiting the results of their first claims submitted since rules changed in 2023 and all the new inspectors came on board.
The outcome of these court cases and recent claims could have significant implications, not just for the companies involved but for the entire UK tech sector.
(By the way, previous successful claims are not home and free, HMRC can go back and review claims up to 4 years old and there are recent examples of where organisations have received tax relief and then been asked to give it back).
The need for a rethink
While improving and simplifying the guidance might offer some benefit, the real solution may lie in a complete overhaul of the scheme. Tax incentives that support the creation and growth of innovative new businesses are undoubtedly valuable, but itโs becoming increasingly apparent that this particular scheme may no longer be fit for purpose.
There are certainly at least, questions to ask about the the feasibility of the scheme, given the growing cost and effort required for HMRC to manage it effectively and prevent fraud, the increased burden on organisations to submit detailed claims, and the rising uncertainty over whether those claims will be accepted.
An incentive you canโt rely on?
Despite HMRCโs claim of “making R&D easier for small companies,” recent developments have made the scheme far more difficult to navigate.
With increased scrutiny, a much greater burden for making claims and greater uncertainty as to whether claims will be accepted, many tech companies are finding it increasingly difficult to benefit from the scheme.
If tech companies can no longer rely on the R&D relief scheme, it ceases to be an incentive.
Scaling tech teams: it’s not just about adding more people
A common misconception is adding more people will speed things up. Often this can lead to only marginal gains and ๐ฎ๐ข๐บ ๐ฆ๐ท๐ฆ๐ฏ ๐ด๐ญ๐ฐ๐ธ ๐ต๐ฉ๐ช๐ฏ๐จ๐ด ๐ฅ๐ฐ๐ธ๐ฏ by exacerbating existing inefficiencies.
Here are some of the common reasons why ๐
๐ง Key person dependencies – bottlenecks on particular individuals.
๐ค Lack of automated testing – resulting in lengthy (and error prone) manual testing required for each release.
๐งฉ Complex code – significant effort often required even for small changes.
๐ฏ Lack of clear prioritisation and focus – trying to do too much at the same time and regularly shifting priorities meaning everything goes more slowly ๐.
โ Unclear requirements – resulting in a high change failure rate and lots of re-work.
๐ค Lack of collaboration – working as a group of individuals rather than a team – exacerbating bottlenecks on key individuals and roles.
๐ Low talent density – skill gaps and lack of familiarity with modern best practices, unable to ๐ฅ๐ฐ ๐ต๐ฉ๐ฆ ๐ฉ๐ข๐ณ๐ฅ ๐ธ๐ฐ๐ณ๐ฌ ๐ต๐ฐ ๐ฎ๐ข๐ฌ๐ฆ ๐ต๐ฉ๐ช๐ฏ๐จ๐ด ๐ด๐ช๐ฎ๐ฑ๐ญ๐ฆ (edit: added)
If you’re experiencing some of the challenges above, I generally recommend focusing on improving how your existing team operates ๐ฃ๐ฆ๐ง๐ฐ๐ณ๐ฆ adding more people (which might mean temporarily bringing in specialist support to address specific skills gaps).
The double benefit is in the short term, you get a greater impact from your existing team, and when you do decide to grow, it will increase the impact of any new roles you bring in.
As I’ll regularly say, ๐ฅ๐ฐ ๐ญ๐ฆ๐ด๐ด, ๐ฃ๐ฆ๐ต๐ต๐ฆ๐ณ and ๐ด๐ญ๐ฐ๐ธ ๐ฅ๐ฐ๐ธ๐ฏ ๐ต๐ฐ ๐ด๐ฑ๐ฆ๐ฆ๐ฅ ๐ถ๐ฑ.