They are also being told they can make a provision for future costs relating to GDPR and get tax relief in the current period, and that this is HMRC approved.
In brief, GDPR is data protection legislation that requires businesses to protect personal data and maintain internal documents/procedures, such as a central record of processing (a register detailing each business process that involves personal data, it’s legal basis of processing and how risks are mitigated).
Whether or not there is an R&D project depends on whether the project:
- looked for an advance in science and technology
- had to overcome uncertainty
- tried to overcome this uncertainty
- could not be easily worked out by a professional in the field
https://www.gov.uk/guidance/corporation-tax-research-and-development-rd-relief
Page 11 onwards of the guide available at this link explains this in a client-friendly format: CIRD99500 – R&D tax relief: simple guide for small companies
With regards software, HMRC accept that the ICT sector is so fast-moving that further advances overtake new and ground-breaking developments very quickly. What is important is that a project represents an advance at the time of development not just for the company itself, but the sector as a whole. There are specific guidelines for software at:
CIRD81960 – R&D tax relief: conditions to be satisfied: BIS Guidelines (formerly DTI Guidelines) (2004) – application to software
CIRD81980 – Case Studies demonstrating R&D tax credit claims for software projects
Research and Development (Prescribed Activities) Regulations 2004 (SI 2004/712) confirm that for an activity to qualify as R&D it must satisfy the accounting requirements and also the requirements of the Guidelines; where there is a conflict between GAAP and the Guidelines, the Guidelines take precedence.
Ideally a professional in the ICT sector should give an opinion about whether the above criteria has been met, however simply buying and adapting software for your own client is unlikely to be sufficient.
You would then also need to consider whether qualifying expenditure has been incurred and actually paid. See: CIRD82100 – R&D tax relief: categories of qualifying expenditure: overview
You should also be careful as HMRC are intending to put R&D claims under further scrutiny over the next few years to target abuse and improve compliance. In their report , published November 2021, they mention how they have seen a recent emergence of R&D advisers, who are typically not members of professional bodies, cold-calling Small & Medium Enterprises (SMEs), suggesting they could make an R&D claim.
Some of the ways they intend to do this include the need for companies to inform HMRC in advance of a project they intend to make a claim. The claims will also need to include any details of agents who have helped make the claim. The cynical amongst you may wonder whether there is a mad rush by these “providers” in view of the proposed R&D changes.
As always it is important to use reputable providers and ensure that you have considered your own professional obligations.
It is important to note that HMRC does not approve tax planning or the use of provisions. Instead, accounting provisions are allowed for tax purposes if they meet the conditions as set out in: BIM46510 – Specific deductions: provisions: allowability for tax
It is unclear whether such a cost can be estimated with sufficient accuracy, unless the company may already be underway with some GDPR reform, or under investigation. Further, if any element of the future cost relates to penalties or fines for illegal actions, then it is unlikely that it would be allowable revenue expenditure.
As such, we would proceed with caution if considering making such provisions, and ensure you look at accounting principles, as well as the subsequent potential tax position.
Finally, any fees paid to the providers are unlikely to be allowable as they are not wholly and exclusively for the purposes of the trade.
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