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Onshoring is the new Offshoring

by FMS Team

17.10.2022

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Disclaimer: We are experts in software development and maintenance and as such you should always get specialist advice when deciding what actions your company needs to take if you want to  make R&D Tax Relief claims.

Introduction

Research and Development (R&D) Tax Relief is a government incentive designed to reward UK companies for investing in innovation. It is a purposely very broad scheme, not just limited to bespoke software, although that is what we are focusing on today.

The general idea is that your company invests in creating a new (or modifying an existing) product, process or service and you make a claim based on a list of qualifying costs. Once the claim is approved you will get tax relief (if you are profitable) or refund (if you are loss making).

There are actually 2 schemes in the UK, one for SMEs and another for large companies (called RDEC).

Changes are Coming in April 2023

Actually, changes have been happening since it was introduced. For example, the SME version had a cap on the amount that could be claimed put in place in 2021 but potentially a much bigger change is due to take place in April 2023.

The goal has always been to promote innovation in the UK and the new changes take this a step further by requiring the costs to have been incurred in the UK. There are some exemptions but workforce availability is specifically mentioned as not being one of them.

What that means for qualifying Bespoke Software projects?

There are 4 main scenarios to consider as you can see in the graphic below.

Table showing the various scenarios that will be effected by the April 2023 R&D Tax Relief changes

The new changes expand the list of acceptable expenses, hence in some cases the claim will be higher.

As you can probably guess, there are a lot of companies now doing the calculations about if having offshore developers still makes sense. This decision has been further complicated by the fact that, at the time of writing this post in Oct 2022, the GBP exchange rate has meant paying developers in other currencies has significantly increased.

Bringing Development Back Onshore

Based on the number of enquiries we are seeing and what we are hearing from the R&D Tax specialists we work with; a lot of companies are making the decision to onshore their development team. There are, however, a few challenges.

Time:

How long do you think it would take to onshore software development?

Assuming you are going to outsource development then there needs to be time to find the right partner, discuss and sign contracts and some form of handover that can range from a few days to several weeks. 3 – 6 months is probably a good estimate.

If you are expanding an internal team, it probably involves the fairly long process of hiring new staff and getting them onboarded. We would estimate a minimum of 3 months for that.

Capacity:

There was already a very limited pool of high quality developers, project managers and quality assurance personnel in the UK and as the number of companies going through the process of onshoring increases so does the demand for people to fill those roles.

If you are outsourcing your development to a company then their development slots will be filling up quickly too.

Cost:

As a direct result of increased demand then costs are likely to at least remain at their current all time high, if not increase. This makes it more difficult to do the calculations on if you should onshore your development or not.

Summary

This is not a doom and gloom post. The R&D Tax Relief system in the UK has had a positive effect and especially in technology and software has started us on the path to being a centre of excellence.

It is not even an “all good things must come to an end” type post, as, at least for now, the Government has continued its commitment to innovative companies in the UK. They have just refocused on making sure the innovation and the skills to innovate are in the UK.

This is a post about making you aware that you should be making your decisions about onshoring your development team or not now. Speak to your R&D Tax advisor and run the numbers to see what makes sense for your company.

There are many good benefits, not just government financial incentives, to working with UK based developers and if you have decided to do that then please contact us. Full Metal are experts in taking over development projects and would love to talk to you about your onshoring plans.

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