The UK Chancellor’s announcement on improvements in making R&D claims comes at a good time for the insurance industry, according to Stephen Brown.
The insurance industry is increasingly embracing technology; in terms of its own software systems, looking to leverage the value of big data – and there are an increasing number of new start-ups looking to disrupt incumbents through the use of technology.
Whilst many insurers have already been making research and development (R&D) tax breaks, historically it is not an industry associated with R&D. This has meant not everyone who can make a claim taking the opportunity, and in some cases those that have being met with a level of circumspection from HMRC.
What was announced?
The Chancellor referred to the Industrial Strategy green paper which concluded that the UK’s R&D tax credit regime was effective and internationally competitive. He went on to say that changes would be made to provide more certainty and simplicity around claims, and action would be taken to improve awareness around Small to Medium Enterprises
(SMEs). There is no detail on what these changes will be, but if the idea is to increase the number of new claimants then it could be some sort of extension or improvement to the current Advance Assurance system. This currently allows businesses who haven’t made a claim before, and have a turnover of under £2m and less than 50 employees the opportunity to have a pre-clearance for the first three years of making claims.
What is the current system?
There are separate systems for SMEs and large businesses. It is possible to benefit in either through a reduction in corporation tax, or potentially in cash terms if the business is loss making, with claims needing to be made within two years. Administrative burden is definitely one of the reasons that some businesses in the insurance sector do not currently make claims, particularly where resourcing is tight it is necessary to weigh up the potential tax advantage with the time costs of making a claim. As with anything associated with tax, it is always easier to consider this at the start of a potential project than afterwards. Another reason is that this expenditure is capitalised in the accounts and it is thought that this prevents a claim. It is always worth considering this in detail though, as it may be possible to make a Research and Development Allowance (RDA) claim at a rate of 100%. These are part of the Capital Allowances rules usually associated with expenditure on fixtures and fittings but there is a separate section in relation to R&D.
What can insurers claim on?
Projects in relation to software are the most likely candidates, although the development of a software product does not represent an advance in technology simply because it is software. Examples could include developing a new operating system, new or more efficient algorithms that take an innovative approach, or new encryption or security techniques.
If the project has looked to solve some kind of technological uncertainty, and an innovative approach has been taken then it is worth considering the detailed criteria to see if a claim can be made. Where a business undertakes this sort of activity they should also consider one step further as to whether they have something patentable. An invention that provides a new technical solution to a technical problem may be patentable even if it’s captured in computer software. This could lead to being able to have income in relation to this taxable under the Patent Box rules at 10%.
Whilst we await the details of the changes to increase the certainty and simplicity of making claims, those in the industry who have significant technology spend without having made claims yet should consider what value there is for them going forwards.
Stephen Brown is a Partner at Mazars