Insights

Free funding for your SAP projects - too good to be true?

08 Aug 2011 SAP, Return on Investment, Business Case, Consumer Business

Research and Development tax relief scheme is a HMRC incentive scheme available for organisations which provides funding for eligible R&D spend. Andrew Rose R&D Tax Manager within Ernst & Young, discusses the opportunities for organisations to benefit from the scheme.

Foreward by Jaime Wood, Principle Consultant at Bluefin Solutions

Corporation Tax

Organisations bemoan the amount of tax that has to be paid to HMRC as a by product of running what is, hopefully, a successful organisation.

Meanwhile there is often coverage in the media regarding tax avoidance, through both legal and illegal means. Organisations are quite within their rights to look to maximise the openly available and completely legal opportunities for reducing the tax burden they face.

Corporation Tax Relief based on IT Spend

I've been employed by SAP Consulting organisations for 15 years, in the delivery of SAP based IT solutions to countless UK based companies. I've recently completed a long engagement at a global organisation where we were involved in the implementation of a large SAP footprint. As you can imagine, this demanded a significant IT spend by the organisation, on not only employee salary and hardware but on external SAP specialists.

During project closedown I got involved in discussions surrounding innovation within the project delivery. Specifically this related to how Bluefin, and the wider project, had delivered a number of innovative technical solutions that pushed the boundaries around the standard SAP solution offering and also its integration to other systems. The context of this was wider discussions around R&D Tax and how the organisation could benefit from tax relief because of the innovation involved.

This led me into some detailed discussions with Andrew from Ernst & Young regarding the scheme, its mechanics, and its relevance to IT project spend. I'll hand over to Andrew shortly where he will explain the detail in much better language than I can. But first here's a bit of context on why this has caught my attention and why it's so relevant to Bluefin customers.

So what is it all about?

R&D Tax credits are available to organisations who can demonstrate R&D spend on projects. So by definition this is not IT specific. However if you study the detail you will see there are plenty of opportunities to demonstrate how IT projects can qualify. As with everything related to tax returns much of this comes down to interpretation and application. You can read the full detail related to the scheme at the HMRC website. Or you can rely on Andrew to make it more palatable.

Why is this relevant to Bluefin Customers?

This topic is very relevant to Bluefin customers because we are increasingly working with customers to define, prototype and deliver visionary IT based solutions to business problems. With the current tough economic times, competitive edge is increasingly important. Exploiting technology to realise that edge is what we're great at doing. This by definition brings innovation to our customers.  It also means such projects land slap bang in the qualification zone for R&D tax relief. 

Interested to find out how it all works? I'll hand over to Andrew now for a fuller explanation of the R&D Tax scheme.

Andrew Rose - Ernst & Young

Introduction

When people think of R&D they think of scientists in white coats operating in isolation from the rest of the business.  The reality of the R&D scheme is completely different and the definition of what HMRC qualifies as R&D is much broader then what may be initially thought, and most any complex project will likely contain elements of eligible expenditure.

As with anything tax related, there is devil in the detail, but I'll try and give you a flavour of the scheme and how it could be useful to your businesses.

What is considered as R&D for tax credit purposes?

In order for something to be considered as R&D, there are two key principles to keep in mind.

1. The project seeks an advance in science or technology
2. In seeking this advance, a competent professional must overcome scientific or technological uncertainty

So what does this mean?

Essentially it means that if you're working on any project where you're stretching the limits of the technology, or you're doing something that as an expert in your field that you've never seen or done before, chances are you're performing R&D.

So what does an advance mean in this case?

• It may have tangible consequences (better, faster, cheaper)
• The advancement must be over and above what is publically available and therefore not just an advancement for the company itself

What's uncertainty mean in this case?

• Is the advancement sought scientifically or technically feasible ("can we even do this?", "we know that it can be achieved but we don't know how to achieve this, or what alternatives will work")
• System uncertainty - the combination of a number of known components, but in a way that has never been done before with unknown outcomes.  Whilst individual components perform well on their own, they may not have the capability to be easily integrated with other components.

Sounds great! So what's not R&D?

R&D has to represent a technological or scientific advance, so simply improving a business process is unlikely to qualify. There has to be some underlying technical or scientific challenge to the project.

So what's the benefit?

• The potential for cash back!
• Reduction in taxes payable
• Source of financing through improved cash flows
• Reduction in corporate tax rate  

Now, presuming that a sufficient proportion of your IT project spend qualifies that can add up to a lot of relief!

Why have I never heard of this before?!

A very good question.  As IT professionals (prior to joining Ernst & Young I worked in industry) we're often not privy to the workings of the finance team at our own and customer organisations, and generally the only time we think about tax is when reviewing our personal payslips.

What kind of SAP Projects qualify?

At Ernst & Young it is fairly common for our clients to work with us seeking relief on their SAP projects. A good example of something which often contains R&D is a bespoke legacy application requiring integration into the SAP landscape, by definition there is unlikely to be an off the shelf solution for this, and any time spent working out a solution for overcoming this is likely to be R&D.

Other scenarios worthy of consideration involve aspects such as bridging the gaps between master and transactional data within the SAP landscape, in order to deliver an enhanced business solution. For example, within SAP CRM 7.0 there is functionality to generate outbound call lists for call centre agents. However there is no up to date transaction that facilitates spreading of those calls between agents. If you were to develop a new solution which facilitates call spreading, that fills an innovative gap in the standard solution and is of interest to SAP themselves, then you have advanced technology and possibly overcome uncertainty.

Summary

In difficult economic times and with IT budgets under increasing downward pressure, the R&D scheme represents a means whereby a good chunk of real money can be saved from an organisation's tax bill.  Moreover, it helps demonstrate a wider business awareness which can only be viewed positively by prospective customers or internal management teams.

Any Comments?