R&D tax relief: money back from modernisation
By Rebecca Heap
Rebecca Heap considers how firms developing legal tech may benefit from R&D tax relief
Traditionally part of a conservative industry with regimented procedures and a resistance to change, law firms are now recognising and embracing technologies to improve processes and productivity.
Covid-19 lockdowns acted as a catalyst for many, with a surprisingly smooth transition to video meetings, virtual court hearings, video arraignments, remote ID certification and electronic signing platforms. This has left firms questioning their prior procedures and seeking new ways of utilising technology for gains in efficiency.
In a competitive market with increasing workloads, it is no surprise many firms are turning to automation and investing in innovation to drive productivity and improve their margins. There is no shortage of specialist legal technology firms offering solutions to support compliance, administration, and process automation. Some firms are going further, often collaborating with technology companies to explore the capabilities of machine learning, natural language processing and other emerging technologies.
The modernisation and increase in innovation across the entire professional services sector is something that has been apparent.
There has been a compelling increase in the demand and opportunity for research and development (R&D) tax relief claims within the professional services sector. Most law firms we meet are investing in technology and undergoing digital transformation that can qualify under the scheme. What many firms don’t realise is they can reclaim up to 33 per cent of these costs through an R&D tax relief claim.
R&D tax relief is a government tax scheme designed to encourage innovation by incentivising companies to develop or collaborate on new or improved products, processes, services, or systems, enabling them to reduce their tax bill or claim tax refunds on a proportion of their R&D expenditure.
The R&D tax scheme was introduced in 2000. Since its inception, the government has increased the benefit for companies to encourage R&D expenditure and put the UK at the forefront of science and technology. The UK is still investing too little in R&D expenditure, with currently around 1.7 per cent of GDP per annum compared to an EU average of 2.0 per cent of GDP. The government has set a target to increase R&D expenditure to 2.4 per cent of GDP by 2027, with the R&D tax scheme acting as the main stimulus to achieve this.
While the scheme is not available to LLPs, thus excluding a proportion of law firms, some may still be able to claim if they have a subsidiary limited company that incurs relevant costs. Otherwise, those trading as limited companies should act quickly, as R&D Tax Relief can be claimed from your previous two accounting periods. The benefit received relates to the company’s eligible R&D expenditure for each accounting period. The benefit claimable is dependent on the tax position and the size of the business:
· a tax reduction or refund of 24.7 per cent of the expenditure for profitable SMEs;
· a cash benefit of 33 per cent of the expenditure for loss making SMEs;
· a cash benefit of 10.5 per cent of the expenditure for large companies through the Research and Development Expenditure Credit (RDEC) Scheme.
Most of the eligible costs for law firms will be employee and third-party costs for the time spent on, or contributing to, R&D projects. This can include salaries, bonuses, national insurance, pension and reimbursed expenses from an employee, costs of externally provided workers as well as up to 65 per cent of the total cost of subcontractors and freelancers. Other costs that can be included are software licenses and a proportion of overheads and consumables.
The definition of R&D for tax purposes is a project or activity that seeks to achieve an advantage in science or technology. This includes making (or trying to make) an appreciable improvement to an existing process, product, or service through technological changes. It could also involve the use of technology to duplicate the effect of an existing process, product, or service in a new or appreciably improved way e.g., making it more time or cost effective.
To this end, common examples of R&D that can be claimed for, within the legal sector, include the following:
· Proprietary development of, or technical enhancements to, Artificial Intelligence (AI) tools, platforms and solutions, for analysing or creating contracts, legal documents, or other unstructured forms of information – this can take the form of utilising and/or extending a wide range of AI technology types, including machine/deep learning; natural language processing (NLP); and neural networks, as well as open-source code libraries provided by technology third-party vendors, e.g., AWS, Google Cloud Platform, etc;
· Leveraging technology to create both compliance and regulatory frameworks for internal and external use, thus guaranteeing adherence to wide ranges of associated legislation types, e.g., GDPR;
· Automation-based technical solutions to improve both the efficiency and accuracy or veracity of processing legal documents and/or contracts;
· Utilising technology to expand the technical capabilities or functionality and/or key performance indicators (KPIs) associated with both internal and third-party or vendor-based systems, as well as performing innovative and green field integrations with existing systems, within the public domain of knowledge;
· Devising new methods to improve the cyber security capabilities of the firm, namely system infrastructure or architecture improvements and/or building new cryptography techniques to secure datasets being stored either physically, or in the cloud.
A real-world example of two such claims, that were efficaciously prepared, filed and processed by HM Revenue & Customs (HMRC) in collaboration with Beavis Morgan, pertained to a legal tech firm that re-engineered and redeveloped an existing internal IT system/platform to leverage both AI and machine learning technologies.
This enabled the company to automate internal workflows, by utilising NLP to both analyse, to a high degree of veracity, and streamline the reading of legal documents and contracts. It also allowed the enterprise to glean significant semantic meaning from the same, through the additional division of a unique data dictionary and nomenclature database.
Our specialist team at Beavis Morgan can help you with all aspects of your R&D Tax Relief claim and
help you ascertain whether you are eligible to qualify under the scheme. Through our time-efficient
methodology we can identify and capture technical information and expenditure on qualifying
We can then prepare a robust report for submission to HMRC and liaise with them as
necessary to obtain your rebate back in an average of 30 days.
If your answer is yes to any of the following questions, it is a good indication that your business is
eligible for R&D Tax Relief, and we would be delighted to help you explore this further:
- Does your business employ or use third-party software developers, engineers, project
managers, and other technical personnel to undertake software development or R&D work?
- Has your business updated or implemented new internal ERP/CRM systems or undertaken
other back-office software development?
- ·Does your business have a technical strategy and engage with specialists for technical
expertise as required?
Rebecca Heap is a research and development tax relief specialist at Beavis Morgan beavismorganrandd.com