July 29, 2015

R&D Tax Credits

In the past we have written blogs and given presentations about the basics of the R&D tax credits. We’ve covered the ‘What, When and How’ you can apply for this Government sponsored Tax Credit.

As we grow here at ihorizon, we are proud to engage with so many technology startups at various stages, that we often need to answer ‘The Who’ question – Do I qualify? Everything I do is R&D isn’t it?

This question covers two key areas – the ‘administrative’ side of qualification, and the ‘tech’ side of qualification.


The Administrative bit:

This is pretty straightforward.  It’s made up of a mix of your legal company status, the location of your spend on R&D, and the amount of profits or losses you have.

We can get technical here as companies receive a better rate of return if opting to offset current or future tax liabilities, compared to receiving a cash credit. Further options include the possibility of changing your year-end to suit your investment negotiations. For some startups, gaining that crucial extra month or two of runway allows you to seal the perfect deal. However since these are so specific, we suggest you get in touch for a chat about whether you qualify on the admin side.


The Tech bit:

On to the tech bit. We have covered the legislation basics in our previous blog and talks, so we thought this time we would move beyond the legal definitions, and into some practical examples of where the boundaries of ‘qualifying R&D’ lie.

Let’s start by identifying what is not R&D. Tech companies undertake constant iterations that constitute R&D from an internal company perspective, but these do not all qualify for tax credits.

A common line in the sand is that backend work tends to qualify, but front-end work generally does not.  There are of course exceptions to the rule. For example, when it’s a small part of a larger innovation, then front-end work may qualify. Or perhaps you’re doing advanced front-end development, such as building complex cross-browser widgets within security environments using new open source technology. We help you determine if you qualify.

The other issue you may face is claiming that your whole product is an advance, and therefore all work qualifies. Even if this is the case (which is rare) you must split your product into relevant development streams for the purpose of the claim.  This is often one of the most challenging aspects as development in tech startups is usually a constant stream of intertwined iterations.

So what does qualify I hear you scream!  Let’s take a look at some common recurring examples of qualifying projects. (This is far from a complete list of examples, and more a guide of the types of projects that would qualify)


Building a scalable, reliable and extensible custom cloud-based backend, made to handle unique big data sources

There are many exceptions to the rule, but often if you’re combining technologies to develop a custom backend infrastructure, and utilising specific big data sets, then there is a high likelihood you’re doing qualifying work. Whoop!

Questions to ask yourself are:

  • Did I have to consider and research multiple cloud providers, and find that some weren’t technically up to the task?
  • Did I test certain languages with some examples of failure before ending up with my current solution?
  • Was there uncertainty over the scalability, or cost efficiency of the proposed technologies?
  • Did I have to change my database from a relational to a non-relational solution, in order to achieve the targeted cost efficiency and speed goals?


Developing custom or machine learning algorithms

This can range from the creation of basic but novel algorithms, through to complex machine-learning algorithms. The more complex you can prove these algorithms are, the more time you can justify as having spent on them – thus increasing the claim size.

Questions to ask yourself are:

  • Did I have to look at theoretical models that have not been turned into an algorithm therefore making the technical implementation highly uncertain?
  • Was my algorithm unique in terms of the language or data utilized?
  • Did I have to change the language choice or other technologies in order to improve the efficiency or accuracy of the algorithm?


Customising off the shelf technology to meet your needs

Again, massive exceptions exist to this statement as it depends on the complexity of the customisations. However, if you’re working on a cutting edge solution to a problem, and have to research and develop custom changes to off the shelf technology, there is a good chance this will be qualifying work.

Questions to ask yourself are:

  • Did I develop custom scripts or libraries for existing technology to enhance our solution, and was their outcome uncertain?
  • Did I research all off the shelf technologies and determine that modifications were needed but was unsure if these would work?
  • Did I fail at any modifications to off the shelf technology?


For a successful claim, we must make it clear to HMRC that we understand the legislation clearly, and have appropriately identified and claimed for only qualifying work.

There are undoubtedly many questions remaining in your mind, and the list of potential areas of qualifying R&D is never-ending. We suggest you get in touch and have a chat with us to establish whether you have a claim!


Nick McNally is ihorizon’s R&D Tax credits consultant. Drop us an email at nick@ihorizon.co.uk to speak to him.

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