We love working with digital agencies at ForrestBrown. They’re always creative, interesting, ambitious and driven. We’ve also enjoyed helping a number of them claim millions of pounds worth of R&D tax relief.
As chartered tax advisers specialising in R&D tax credits, we’ve learnt a lot from the way that digital agencies operate – this sets us apart from others in our sector.
The problem with so many ambitious agencies is that competition is fierce, and constant. No agency can rest on their laurels, and that’s especially true for digital agencies.
This is partly compounded by their position in the marketplace, caught between technical, creative and business skillsets. It is this position though that also contributes to some of their key opportunities.
The need for research and development
As a digital agency you face competition from – or, more optimistically, are competing in – all directions.
User experience (UX), CRO (conversion rate optimisation), standards compliance and technical site improvements are fought over with developers.
Innovative campaigns and content marketing strategies face pressure from copywriters, publishers, and production companies.
Talented business development staff, in roles ranging from management to directorial to executive, are taking on increasing amounts of high level marketing strategy, campaign architecture, and brand management.
Data analysis and presentation, traditionally a core strength of marketing agencies, has been encroached upon by data scientists and specialist data-handling startups.
As scope, ambition and expectation expands, so too do the inevitable threats and rivalries. For an agency to survive in the long-term, they have to invest in research and development to keep themselves ahead of the curve.
R&D tax credits for digital agencies
One of the major benefits of investing in research and development as a digital agency comes in the form of R&D tax relief. R&D tax credits exist to reward companies that make that giant leap into the unknown. Agencies carrying out R&D can potentially qualify for tax credits under one or both of the two government R&D tax incentives: the SME R&D tax credit scheme and Research and Development Expenditure Credits (RDEC).
Whether agencies are developing their own products, processes and services or finding unique homes for existing ones, they’re often entering uncharted territory.
If you’re already investing heavily in research and development – you may even have people or entire teams dedicated to R&D – then you need to secure the maximum amount of R&D tax credits to which you are entitled.
If you’re not already investing heavily in research and development, now is a great time to start. With attractive incentives from the government combined with a competitive but highly profitable market.
Qualifying R&D in digital agencies
It’s important to first make a distinction between creative innovation and technical innovation. Many projects carried out by agencies, including digital marketing, web development and SEO agencies, are creatively innovative. However, qualifying R&D projects within these agencies will relate to technological innovation and the development of tech to achieve this creative innovation. Creative thinking and innovative campaigns do not qualify for R&D tax credits.
What is R&D in marketing?
- developing technology for increased personalisation in marketing – a one-to-one customer view
- developing internal tools around audience analysis; reporting
Can you claim R&D tax credits in website development?
For digital agencies and web developers in particular, R&D is their daily bread and butter. However, many remain unsure if they can claim R&D for website development projects. Often, they simply don’t see what they are doing as making an advance in technology through the resolution of uncertainty.
Advancement in web development is not so much about new features and functions as it is the processes behind these features and functions. If there is technological uncertainty, it could potentially qualify.
In our experience, if you are customising software or integrating platforms, there are a number of ways in which these efforts could qualify for R&D tax credits. You should think of an advance in two ways:
- Is it new? Have you created a product, process, device or service using new knowledge or capabilities? Or have you extended overall knowledge in the field to gain a competitive advantage?
- Is it an improvement? Have you made an existing product, process, device or service better? Or, have you duplicated something that already exists in a new way?
Now, let’s take a look at what this could actually look like. For digital agencies, R&D qualifying activities can occur in everything from large scale digital transformation projects to smaller everyday tasks. They may encompass the following:
- integrating disparate data systems in a new, or untested way e.g. integrating CRMs with other marketing software or databases
- creating custom middleware
- advancing platform functionality that isn’t readily available
- developing custom algorithms for data search and analysis
- developing machine learning and AI to meet client needs
- creating augmented reality or virtual reality experiences
- integrating VR, AR and AI with something else to create a new product, process or service
- complex CMS integration
- developing bespoke apps for clients
- developing SEO auditing tools
- developing bespoke internal reporting systems
- developing ways to bring data from a number of different sources together
- designing structures and schemas within databases to deliver improvements
- enhancing the data collection technologies associated with digital campaigns
- applying business intelligence algorithms to improve functionality and reliability
Digital agencies can make especially large strides if they commit to big research projects where their remit overlaps with web technology, data analysis, or software development. There’s so much potential for new ideas and new software from digital agencies.
In fact, many digital agencies are already embarking on this type of research and development project – they just don’t realise that they qualify as R&D for the purposes of R&D tax credits.
Example of R&D in digital agencies
It is always exciting to see the innovation that emerges from UK agencies. The following are some examples of award-winning agency projects from Cannes Lions 2018 that would almost certainly have involved R&D:
Global agency Isobar scooped the Digital Craft award at Cannes Lions 2018 for their Aeronaut Music Experience. The powerful content was designed as a fully immersive VR experience, using Cinemachine, a new software tool from creation engine Unity.
Isobar filmed the performance on a stage using 106 cameras. Using computer vision algorithms, they then created textured 3D surfaces of everything in view. The team further processed the resulting holographic video to provide consistency in the meshes over time as well as compressing it for easier transmission and viewing. The experiences were created over the course of a year, beginning In November 2017 with the 2D video launch and coinciding with an event that shared a preview of the VR experience.
McCann London were awarded the Creative eCommerce Lion at Cannes for its campaign for Microsoft that encouraged gamers to design and share their own XBox controllers. Xbox and McCann developed a new web platform that allowed consumers to custom design and share their own controllers. If other gamers purchased their designs, they could then personally profit from it with some earning over £500.
The Cannes Digital Craft jury also raved about ‘Touching Masterpieces’ by Neuro Digital, a Spanish tech start-up. The project used haptic gloves to enable the blind to ‘see’ sculptural masterpieces at the National Gallery in Prague.
Misconceptions about R&D tax credits in digital agencies
At ForrestBrown, we’re amazed by just how few digital agencies are claiming R&D tax credits. This limited take up is often focussed around a misunderstanding of eligibility. It is all too common to find companies that have been wrongly advised that they won’t qualify.
Even digital companies that are already claiming R&D tax credits aren’t identifying the full extent of their R&D activities or which of their costs they can reclaim.
Don’t miss out!
If you’ve been advised that you don’t qualify, it’s worth seeking a second opinion. It costs nothing but could add hundreds of thousands to your bottom line.
There are things that can potentially prevent a company from qualifying under the R&D schemes, but these are often overshadowed by the numerous misconceptions that exist. Here are some of the common misconceptions:
“Loss-making companies cannot make a claim”
Loss-making agencies with fewer than 500 staff and either a turnover not more than €100m, or balance sheet assets not exceeding €86m, can recoup up to 33% of their development costs as a cash credit. Those making a profit can still claim and receive up to 25% of their expenditure returned – that’s up to 25p for every £1 spent.
Regardless of your level of profitability to date, the fact you have yet to pay any corporation tax does not prevent you from claiming. Some of our largest claims have been for early stage companies, investing significantly in developing new platforms and technologies, but with little in the way of revenue.
R&D tax credits can be transferred into cash, providing much needed cash flow for startup businesses, still investing heavily in developing their own IP.
“R&D tax credits are only for successful research”
Failing is a natural part of R&D. The government’s R&D tax relief schemes don’t penalise companies for trying. As long you’ve identified the uncertainties and are genuinely trying to overcome them through R&D, you can include costs associated with unsuccessful projects in your claim.
“Client projects can’t be included”
This is one of the biggest misconceptions. It’s fairly common for agencies to believe that research and development work on projects they’ve been commissioned to carry out by their clients is not eligible for tax relief.
Many people believe their clients should be claiming for this R&D work – in some cases they should be, but it depends on the relationship between agency and client! If your client has engaged you to carry out R&D on their behalf, you are the subcontractor and they should be claiming. If, however, you are undertaking R&D at your own risk on order to deliver, for example, a creative campaign or new web platform, it is likely that you could be eligible for R&D credits. If you’re working on a fixed price contract, then you’re likely bearing some of the risk of any R&D you carry out. It can help to consider what happens if the R&D is unsuccessful – who carries this risk?
“We didn’t do the R&D, a freelancer did”
Many agencies will use freelancers or specialist subcontractors to deliver aspects of digital projects. Although your internal team may not have performed the R&D, if the risk sits with your company, you should be able to include the cost of subcontracting elements of development to others.
“Everything we do is R&D”
It may be true that there is some uncertainty in all aspects of the agency’s primary business. However, as we’ve explained above, R&D tax credits cover technological development, not creative innovation. It is very likely in an agency that R&D projects take place within larger commercial projects, and applying the boundaries of R&D activity accurately and in-line with HMRC guidance is very important.
Once your R&D projects have been identified, claims are calculated based on eligible expenditure, which can include salaries (including employers NIC and pension contributions), subcontractors and consumables. Any project expenditure falling outside of the defined categories won’t be included, even if it was essential to the R&D.
“We’ve been in receipt of grant funding, so we don’t qualify”
It’s true that receiving government aid does impact the amount and way you’re able to claim under the R&D tax relief schemes. However, if you’re subject to corporation tax, you can still qualify. Find out more about the interaction between Grants and R&D tax credits.
“We’re using existing systems”
Agencies often incorrectly assume that using an existing system as the foundation of their R&D means that the activity won’t qualify. Integrating two systems, even if they are ‘off the shelf’, may well still present unique technical challenges that need to be solved. And resolving these technological uncertainties counts as R&D.
“That research was part of a pitch”
Inevitably, pitching for business in the agency world often includes coming to a new business meeting with your ideas already developed. Your client wants to compare your creative and technical abilities to those of your competitors. You win some, you lose some – but importantly, the time your staff spent on creating your proof of concept can qualify.
What doesn’t qualify for R&D within digital agencies
Like we’ve previously mentioned, many agencies are very creative. They have fantastic employees thinking outside the box. However, if the number of creative roles within your business out number your developers then your potential for qualifying R&D expenditure is smaller. With R&D tax credits you can only claim on technical innovation and not creative innovation.
Day-to-day work on CMSs
If an agency is creating simple WordPress sites for clients, then this work would be unlikely to qualify. But if your web development work is somewhat more complex, then R&D credits should be fully explored.
While market research might represent a significant investment on your part, and deliver impressive results for your clients, it’s not what we mean when we say “research”.
To quote from the government’s own guidelines, “Work in the arts, humanities and social sciences, including economics, is not science for the purpose of these guidelines.” Market research is also excluded: “identifying or researching market niches in which R&D might benefit a company… [is] not R&D”.
The cost of tools you create to gather data, novel techniques to analyse the gathered data, or the prototypes of a suggested design alteration may all still qualify as R&D expenditure, however. There is a lot of room for technical R&D within marketing even after discounting ‘market research’ itself.
Making the most of R&D tax credits in a digital agency
Identifying all qualifying costs
It’s important to identify qualifying costs across your entire spend. There is a tendency for agencies to only include qualifying costs from the few written examples they include as part of the R&D tax credit process.
When providing a description of your R&D activity, you should take the opportunity to go beyond the figures and highlight just how innovative your key projects are. However, you need to remember to include all of your qualifying R&D projects and expenditure in the claim in order to maximise it.
Good record-keeping is vitally important to a successful R&D tax credit claim. This is because staffing costs usually form a significant part of any claim. HMRC like to see specifically how employee time is allocated to specific tasks.
Many agencies keep accurate records of payroll costs and time spent against client projects but can fall down on logging time to specific tasks. Make sure you have a system in place to accurately capture this time.
Digital agencies often make the mistake of only including time spent by their technical staff on relevant projects. Innovative projects often involve staff from the wider business and in turn the potential for more qualifying costs.
ForrestBrown – digital R&D experts
ForrestBrown is highly experienced in the digital sector – we really are the best in the business. Our tax team and sector specialists come together with an eye for detail and passion for innovation. This ensures your agency reaps maximum benefits. If you think your agency may qualify or you’re looking for a new provider for R&D tax credits, call our tax experts now for a no-obligation chat. Pick up the phone or drop us a line today.