R&D tax relief for Artificial intelligence and robotics
The artificial intelligence (AI) and robotics sector is by its very nature innovative and relies heavily on R&D activity. A significant amount of this activity will be qualifying activity for research and development tax relief. We recommend that companies identify all of the activities that be included in any claim at the very start of a project.
Whilst HMRC do not have a separate classification for AI and robotics, it is likely that the subject does not sit as a sector vertical but touches any sector that is looking to drive automation and increase productivity. In plain English, these types of development align closely to the R&D tax relief system as the fundamental tests are:
- An advance in science or technology
- Scientific or technological uncertainty
As per the Department for Business, Innovation & Skills (BIS) guidelines “R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology.”
A typical claim is likely to include:
- Software development
- Hardware and resolving how that hardware interacts with software for the intended use
- Creating efficiency in a process
- Testing new materials to create the optimum use of the AI
- Merging legacy systems into new automation
The scheme is broad, and it is likely that if you are working on an AI or robotics project or solely focused on this subject, investigating R&D tax credits is a must.
What qualifies for Artificial intelligence and robotics R&D?
There are five broad categories which AI and robotics R&D claims fall into – these are staff costs, subcontractors, externally provided works (EPWs), consumables and heat, light and power. More in-depth discussion on each of these can be found below.
The majority of most R&D tax relief claims are in respect of staff costs. This includes people directly involved with the activity and others who are indirectly involved. An example of direct costs would be a software engineer or a robotics engineer – they tend to be defined technical roles who are the doers of the project. A common misconception is they are scientists and academics, this is incorrect. If they are a competent professional whose expertise is part of the R&D effort, then they should be included.
Indirect staff are people who are also involved in the R&D project such as management, procurement, purchasing etc where they help enable the R&D to happen and also are part of the management of the process. These costs are usually overlooked and can be a big impact on the claim.
Where you may not have the expertise in house, you may rely on a third party to help with part of the R&D process. These claims are qualifying expenses for the R&D tax relief scheme.
Like subcontractors, you may not have permanent staff but want to have temporary staff for a particular role who act in the same way as employees – i.e. under your care custody and control. These costs form part of the claim.
Any items that are used only for R&D and have no use once the project is completed so consumed by the project is also qualifying expenditure.
When you know how much R&D you are doing, you can then attribute a proportion of your heat, light, power & water to the R&D tax relief claim.
How long will my claim take?
The claim process from initial engagement, submission and through to revenue takes on average four to six weeks. But this can be done in a matter of days if the information is ready. What is needed is to initially assess the viability from a financial point of view to make sure it’s worth making a claim, is a review of your management accounts and tax computations.
What steps does the process take?
If there is a good chance of making a claim, we then arrange the technical interview which will last approximately 2.5 hours. This is when our specialists drive out what is qualifying R&D. We never ask the question ‘Tell me about your R&D’? Why? The subject of R&D tax is much wider than academic definitions so we have a detailed conversation to understand your business and the projects you are undertaking.
What is in the report that goes to HMRC?
The report is then made up of two sections, the technical narrative comes first which is the most important part of the claim. Without it, or with a poor technical narrative, a claim is likely to be questioned by HMRC. The second is the financial report which breaks down the qualifying costs highlighted above.
The reports then go through a Quality Assurance process to check that the claim is robust and maximised.
Finally, these are both submitted to HMRC for review.
How long does it take to get a R&D tax relief claim paid by HMRC?
Payment of any credit or refund on previous paid tax is usually within 28-42 days although during a peak period, this may take longer for HMRC. Both of these result in cash back to the business.
If the R&D tax relief is taken as a reduction to your tax bill, this should be submitted no later than 9 months from your year-end date and will reduce your tax bill accordingly.
Automation of packaging
A client wanted to reduce the reliance on manual handling in the warehouse. Due to the structure of their products, standard machinery was not suitable so they embarked on a project to see if they could get standard machinery to work by amending their process or create bespoke robotics to get an answer.
After almost two years of trials, testing, failed attempts the client achieved what they wanted to – and received a R&D tax credit over £100,000 each year.
Intelligent learning of business intelligence
Our client was a start up software company who had become frustrated with the reliance on teams of people to crunch numbers where they felt that this could be coded and continue to learn based on real life events.
By using a number of standard data feeds then creating the linkages into a singular system, in less than six months our client had a prototype of how this could work. This qualified for R&D and created enough cash flow to help push on to the next phase.
Our client then reinvested that money to employ a small team of engineers to work on the AI. They continue to develop the coding and each year benefit from R&D tax relief.
To find out what we can do for you:
Large or small – there’s a scheme for your company
If you are a Limited company, whether you are profit or loss making, as long as you are operating as a going concern you can make a claim.
You are classed as a small or medium sized enterprise (SME): for the purposes of R&D tax incentives if you employ less than 500 employees and have either an annual turnover under €100 million or a balance sheet under €86 million.
You are classed as a large company for the purposes of R&D tax incentives if you employ more than 500 staff or you have a turnover of more than €100 million and more than €86 million in gross assets.
Do you think you could be eligible?
- Do you design and make new products?
- Do you seek to improve processes, services, materials or devices?
- Do you make prototypes or perform testing?
- Do you develop software or IT solutions?
- Have you invested in failed projects or developed products that are never launched?
- Do you employ any staff with a technical or scientific background?
And even if you’ve made a claim already
We maximise claims through an expert led, detailed assessment of your activities. There is usually a very good chance we will improve them.
On average, we have increased existing claims by 200%, because we know how to find the full potential of your claim.
What does it mean for you?
R&D for Tax purposes does not necessarily mean blue-sky research which is a common misconception that can prevent companies from receiving the benefits from HMRC that they are entitled to.
RDEC allows the benefit of R&D to be accounted for within the Profit and Loss (P&L) account, above profit before tax, rather than only through the tax account. So, under the RDEC scheme, large companies who are loss making are now able to benefit from their development efforts for the first time, by way of an immediate net of tax cash credit, which is tax exempt.
The RDEC also enhances the company’s earnings before interest and taxes (EBIT), therefore ends up being more lucrative for larger companies.
The scheme is now a straightforward subsidy against the level of R&D spend that your company incurs.
Why it feels different when you work with GovGrant
Our one and only goal is to get you the maximum benefit you deserve for innovating in the UK. When you meet our specialist, it will feel like you’re talking to a colleague rather than your advisor.
We don’t start with your balance sheet. We start by walking the floors and understanding the things you do and the things you make.
There is no conflict of interest. As this is all we do our advice will never conflict with other tax or audit advice you receive.
You are paying for our expertise (not to support a large corporate infrastructure). Experience tells us that when other firms prepare a claim that they leave some of the value off the table. Even the biggest names.
On average, we see an uplift of 200% over what companies have claimed themselves or using another adviser.
We are not the Big 4 ,and we are proud of it. We are the challenger and the better pair of hands. Innovation is about pushing the boundaries and embracing uncertainty to gain advancement.
Over 300,000 R&D tax claims have been made*
£26.9 billion in R&D tax relief claimed*
The average claim under the SME scheme so far in 2017-18 is £53,713*
The average claim under the RDEC scheme so far in 2017-18 is £600,977*
has successfully processed over 6,800 claims
We have delivered over £200m of claim benefit for our clients
The best way to predict the future is to invent it.