By Jelle Wijndelts

Industry voice: Why aren't enterprises using SAM data to secure R&D tax credits?

Many CIOs are failing to make the connection between the amount of tax their company pays and their existing software asset management (SAM) programmes.

The majority of organisations now have a SAM programme underway to ensure they are compliant with software licensing obligations and avoiding unnecessary licensing costs.

In addition to these benefits, SAM could also be helping to reduce (and potentially even eliminate) future corporation tax bills, by providing evidence to support successful tax relief claims through the Government’s R&D tax credits scheme.

R&D tax credits

Currently one of the most lucrative tax relief opportunities available to UK organisations, R&D tax credits are applicable to companies of all sizes. They enable up to 225% tax relief to be claimed against the costs of an R&D investment.

This means for every £100 incurred in costs for a qualifying project, the Government allows the company to reduce its taxable profits by £125, in addition to the £100 already claimed in the company’s P&L account as a tax deductible expense. It can be offset against the cost of hardware, software and human resources.

Once eligibility for credits is agreed, the recipient has the potential to receive either a cash lump sum or future corporation tax rebates. Most claims generate a rebate of £100,000 but for some companies, the saving can run into millions of pounds worth of tax relief over multiple financial years.

Importantly for larger companies, new legislation introduced in 2013 now allows the reporting of R&D tax credits awarded to be ‘above the line’ and therefore highlighted in the same way as a grant. This means they are visible to R&D budget holders, published on company reports and can be offset against operating expenses to obtain a cash credit.

Unfortunately this scheme has historically suffered from the perception that R&D must signify some form of scientific development. That isn’t the case, some projects designed to improve organisational processes can also qualify, including investment in new technology.

This is classified within the ‘development’ portion of the scheme, provided that the end product is a new or substantially improved service and / or results in improvements to existing processes or systems.

Software asset management

For companies that have ongoing software asset management (SAM) programmes, although implementing a SAM platform would not qualify as a suitable investment for obtaining R&D tax credits, the data held in a SAM solution may help a company to provide the evidence required to qualify for the rebates.

These can be secured for employee costs, i.e. the cost of staff employed who are actively engaged in carrying out R&D activities, consumable or transformable materials purchased used for R&D and computer software used in R&D.

Consider for example a large petrochemical company, which has a dedicated development department within its IT function and whose remit is to build specialist applications to sustain the business.

These activities would most likely qualify for R&D tax credits and they have a SAM programme in place already. Their existing SAM solution becomes a tracking and reporting tool to isolate which activities could count as R&D and quantify the extent of involvement.

Used in this way SAM could be playing an important role in helping companies to isolate the costs of their R&D programmes and obtain tax relief on the expenditure. By configuring the data in SAM using auto connect rules, identifying R&D related areas in the company and then combining this with the relevant software costs, it is possible to support a tax credit application.

Some of the biggest IT consulting firms have spotted the connection between SAM and R&D tax credits and are actively looking for ways to use this as a business development lever.

This should be a cue for CIOs to become aware of the financial opportunity to cut tax expenditure even further and at the same time, get more value from their existing investment in SAM.

Judging by the continued level of support R&D tax credits is getting from the Government – the value of the credit portion was further enhanced in the March 2014 Budget to just over £32 for every £100 spent on qualifying activities – this initiative will be continuing for some time yet.

  • Jelle Wijndelts is a SAM expert working with enterprises to help them implement Snow License Manager and generate greater value from their investments.