Accounting & Tax for IT & Technology Companies

Qualifying activities must seek to achieve an advance in science or technology — resolving a technical uncertainty that a competent professional couldn’t readily resolve from existing knowledge. For tech companies, this includes: novel algorithm development, machine learning model architecture, cybersecurity innovation, integration of systems where existing APIs are insufficient, custom database architectures, and development of novel user experience mechanisms. Routine software configuration, implementing existing frameworks or replicating existing functionality does not qualify.

Under FRS 102, development costs should be capitalised when all the following can be demonstrated: technical feasibility, intention to complete, ability to use or sell, probable future economic benefits, adequate resources to complete, and ability to reliably measure expenditure attributable to the development phase. Research phase costs (including feasibility studies, prototype testing to proof of concept) are always expensed. The capitalisation decision affects both the balance sheet and the R&D tax credit claim — capitalised costs may not be eligible for R&D relief in the year of capitalisation.

EMI options require: (1) an HMRC valuation of the shares before grant (we prepare and submit the valuation); (2) signed option agreements between the company and each optionholder; (3) notification to HMRC within 92 days of grant; and (4) an annual return filed with HMRC. The EMI scheme must qualify — the company must be independent, carry on a qualifying trade, have gross assets below £30m and employ fewer than 250 FTE employees. Options can be granted up to a maximum of £250,000 per employee (£3m across all employees).

For UK B2C (consumer) sales: UK VAT at 20% applies on sales to UK consumers. For EU B2C sales: VAT at the destination country rate applies if you exceed the €10,000 OSS threshold — register for Non-Union OSS via HMRC. For US and other non-EU B2C: generally outside scope of UK VAT, but local digital services tax may apply. For B2B sales (to VAT-registered businesses): reverse charge applies in the customer’s country — you zero-rate the supply but must retain evidence of B2B status.

Tech contractors are the single highest IR35-risk category. The nature of tech work — working on-site or remotely within a client’s development team, following client technical standards, being integrated into the client’s processes — often creates high control, which is a key IR35 indicator. We assess each engagement individually, reviewing contract terms and actual working practices, and provide a written opinion. We also identify contract amendments that, if agreed with the client, reduce IR35 risk.

Many tech companies are still using pre-2024 claim methodologies. The merged scheme has different eligible cost categories, subcontractor restrictions and documentation requirements. A claim prepared under the old SME scheme framework may be technically incorrect under the merged scheme — leading to HMRC challenge.

Expensing development costs that meet the FRS 102 capitalisation criteria understates intangible assets and overstates expenses. While this reduces CT in the short term, it creates balance sheet issues for investors and lenders, and may conflict with your R&D tax credit claim narrative (if you claim the costs as R&D qualifying expenditure while simultaneously treating them as capitalised — the interaction requires careful management).

HMRC must be notified of EMI option grants within 92 days of the grant date. Late notification doesn’t disqualify the options retrospectively (HMRC has discretion to accept late notifications with a reasonable excuse), but failure to notify at all means the options lose their EMI status — and employees pay income tax instead of CGT on exercise.

B2B sales to overseas VAT-registered businesses are generally outside the scope of UK VAT (reverse charge in the customer’s country). B2C sales to overseas consumers are not automatically VAT-free — they may trigger OSS obligations (EU), MOSS obligations (UK now excluded from EU OSS) or local digital services tax registrations. Many SaaS companies incorrectly apply the B2B zero-rating to mixed B2B/B2C customer bases without adequate verification.