Each year thousands of businesses claim R&D tax credits for their software development work. According to HMRC, the “Information and Communication” sector is the 2nd largest claimant of the SME R&D tax credit. The sector lodged 12,165 claims in 2019, representing 23% of the total claims in the UK. The majority of these will be for software development projects.
Despite how common they are, software claims are often more nuanced than, for example, traditional manufacturing claims. Indeed, HMRC published guidelines specifically for software claims to help clear up some of the complexities.
This article will summarise the most important points from the HMRC guidelines, and also include some points from our own experience of submitting hundreds of software claims.
Firstly, we’ll look at which types of software projects qualify for R&D tax credits. We’ll then highlight the qualifying costs associated with those projects.
Which software development projects qualify for R&D tax credits?
The standard test for R&D eligibility also applies to software development projects. The projects must:
- Seek to create an advance in the field of science or technology.
- Overcome scientific or technological uncertainty in order to achieve this.
We’ll now look at how each of these tests applies specifically to software development projects.
Advance in science and technology
To claim R&D tax credits for software development you’ll need to state where the intended advance in science and technology occurred. With software development claims, the advance can occur in two ways. The software development can be an advance in itself, or the development can be at the service of another advance.
Advance in itself
Some software R&D projects will advance the knowledge-base of the software development field itself. For example, if you put a cutting-edge programming language to new use, meaning it serves a function that other developers haven’t previously documented, then that would in itself be an advance in the field of software development. In that case, the work would qualify for R&D tax credits.
At the service of another advance
Alternatively, you can also claim for your software development work if it was at the service of an advance in a different field or domain. For example, if you develop a new type of underwater camera for which you create software to help it function, then the software development doesn’t need to be an advance in its field. If the underwater camera is an advance in the field of underwater photography, then the software work to achieve that advance would qualify for R&D tax credits.
This distinction is important because we often see claimants underclaim for the software development work done at the service of a broader R&D project.
It’s also important to reiterate that you only need to “seek to create” an advance in the field. The project doesn’t need to successfully achieve that outcome to qualify.
Additionally, you’ll want to ensure that HMRC are confident in your “competent professional” test. While the feasibility study may not have been carried out by your most senior engineer, it’s a good idea to communicate that the most senior team member was involved in the decision making. We recommend including their profile in your claim.
There are two points to make here. Firstly, the uncertainty must be at a technology level and not at a system level. Secondly, you need to show evidence that the uncertainty was not immediately resolvable.
Technological not system uncertainty
One common problem we see with software claims is that the uncertainty is at the systems level and not the technological level.
For example, the architecture of your software could be so complex that you’re unsure if an adaptation would work. However, that uncertainty is not sufficient to make a claim. It would not count as technological uncertainty.
Technological uncertainty could, for example, relate to the components within the architecture and how they interact. As an example, using an undocumented combination of two coding languages would involve technological uncertainty. However, being unsure of your own systems architecture is not sufficient to classify the work as an R&D project.
Evidence required to demonstrate uncertainty
As with all claims, you’ll need to demonstrate that you aimed to resolve the uncertainty. The best way to do that is to show that a developer could not easily and readily find a solution. From the BIS Guidelines:
“Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field.”
In software development, it’s particularly important to demonstrate that off-the-shelf solutions were not sufficient. Knowledge of what’s possible with off-the-shelf solutions is easily accessible to a developer, so it’s vital that you rule out a variety of nearby solutions to show that you worked on the uncertain edges of what’s possible.
We recommend that you include any feasibility studies you put together ahead of the project. It’s also useful to include links to relevant SDKs or repositories, demonstrating how they were insufficient for the required outcome.
Qualifying activities and costs for software development R&D tax credits
Here we touch on some of the more commonly overlooked R&D costs and activities for both SME and RDEC claims. Consider including these to help maximise the amount of credit you receive:
One of the common misunderstandings we see amongst claimants is the lack of scope of what constitutes R&D. The product work you do on a project should qualify as well as the engineering work. HMRC recognises that R&D starts a long time before the actual build happens. R&D includes time spent assessing technical feasibility, researching potential solutions, plotting the technical architecture, Q&A testing and other in-house product work which supports the developers writing the code.
Generally speaking, HMRC allows claims against the cost of in-house testing, but not for user-acceptance testing or beta-testing. That difference is defined by who is doing the testing. If your team does the testing then it qualifies, but if users test your software then it would not qualify. HMRC assumes that the technological uncertainty has been resolved at the point the product is deployed and used by customers. There can be occasional exceptions, which we’d be happy to advise you on.
It’s possible to claim for the hosting costs which relate directly to the R&D project, but not those relating to business-as-usual activity. Separating out the hosting costs for R&D projects can get quite tricky so again we’d recommend speaking to our team on this point.
EmpowerRD for software development R&D tax credit claims
EmpowerRD was founded with the belief that too much public funding was being taken by inefficient advisors who weren’t incentivised to lower their cut. To solve this problem we’ve used technology to radically improve the process of making an R&D claim: making it more reliable, time-efficient and cost-effective in the process.
We’ve processed hundreds of claims for software development businesses, including CharlieHR and Cognism. Our team of advisors include ex-HMRC inspectors who ensure that you submit a robust claim for the maximum credit available. In addition, our platform significantly speeds up the process of making the claim, meaning that your tech team spends less time on the claim and more time developing your software.