R&D tax credits expanded to increase innovation

[Software companies] perform R&D on a continuous basis, as an integral part of the software development process.

David Bradshaw
Principal analyst
Ovum

One of the benefits of the recently announced tax credits for R&D in the UK was the extension of the employee upper limit from 250 to 500, which should provide a significant aid to innovation in larger companies.

Research has indicated that small companies (under 250) had benefited from Government tax credits, but those between 250 and 500 were seeing a drop in R&D activity.

So the increase in the employee limit is seen as a significant boost to growing companies, at such a vital time in their development.

Dynamic ecosystem

The hope is that high growth-rate, medium-sized companies will be able to exploit the better conditions of this scheme.

Tom Wills-Sandford
Deputy director general
Intellect

One sector that will particularly benefit is the UK software industry, which comprises a large number of companies in the 250 to 500 range.

The UK is already home to many global software players such as IBM, Oracle, Microsoft and HP, as well as established domestic companies including Sage, Mysis, Detica and LogicaCMG.

“The UK software industry is very vibrant, with Oracle, in particular, turning out a cadre of high-calibre managers, which acts almost like an academy for software entrepreneurs,” explains David Bradshaw, principal analyst at market research house Ovum.

Combined with £180 million of venture capital (VC) funding in 2005 and strong academic expertise, the presence of global players has created an ecosystem of home-grown companies, particularly in the 250 to 500 range, including Aveva, Comino Group, Compuware and i2.

Making the leap

As a result of the increase on the eligibility for tax credits, a larger number of growing UK software companies will be able to claim benefits and, in turn, fund their growth through greater R&D and innovation.

“The hope is that high growth-rate, medium-sized companies will be able to exploit the better conditions of this scheme,” says Tom Wills-Sandford, deputy director general of IT trade association, Intellect.

“The new rates are much better, and moving the limit will benefit the software companies in that band.”

R&D focus

At the same time, software is a naturally R&D-intensive industry, with up to 45 per cent of revenues being spent on developing new products, so UK companies are ideally placed to benefit from the higher levels of R&D tax credits.

“Software companies are inherently R&D-heavy,” says Bradshaw.

“They perform R&D on a continuous basis, as an integral part of the software development process.”

Specialist centres

Yet the good news for UK software companies does not stop there, with the announcement that the Government will also create 10 dedicated centres for processing tax claims from SMEs.

At the same time, tax inspectors will receive specialist training in the process of R&D, particularly in software- and engineering-related disciplines.

Previously, there were concerns that a lack of understanding of the notoriously complex process of software R&D had meant that some companies were missing out on their full entitlement.

The centres are planned to open at the end of the year, and should make the process more consistent and, more importantly, ensure that UK software companies receive full value from the R&D tax credits.

“The opening of these new centres addresses a key concern: that the Inland Revenue [HM Revenue & Customs] didn’t fully understand software development, so if we can improve that process it can only help the UK software industry,” says Willis-Sandford.