Software development is such a quickly advancing field that even those at its epicentre can find the pace of change overwhelming. As Rocky Lhotka, who created the CSLA .NET framework, asked “Who has time?… Not only do we all have real work to do… but on our doorstep is a mounting pile of new and potentially better technologies.”
HMRC have similarly had difficulty keeping up with the pace of change. For a long time, HMRC needed to use their own tech team to assist them with some software development claims. As a result of these challenges, HMRC updated their guidance on software claims to help their team, advisors and claimants guarantee clear and fair claims in the area. These guidelines are known as the “BIS” guidelines.
For reference, the lengthy BIS guidelines are listed here on the UK government’s website. However, for those without the luxury of time, this guide gives some indication of the key things to consider when making an R&D claim for new software development projects. It should be useful for companies of all sizes, from start-ups to multinationals. We’ve broken down our insights into the three following categories:
- Advance in science and technology
- Overcoming uncertainty
- Qualifying software and development activities and costs
Advance in Science and Technology
For all R&D tax relief applications, HMRC requires that the R&D activities represent an “advance in the field of science or technology”. Within the realm of software research and development that has notable implications. HMRC explicitly states in the guidance that just because the project involves the development of software it does not automatically qualify as R&D. Instead, the advance in its field can occur at two layers.
Either the software is created or adapted to aid a greater R&D project (which is itself an advance in its field), or the creation/adaptation of the software required a technological advance in the field of software development for completion. Either way of registering the “advance in the field” are eligible.
R&D projects must also “overcome uncertainty” to qualify as R&D. In the software development domain, HMRC emphasise the need for the uncertainty to be at the technological level and not at a systemic or organisational level. For example, the architecture of your software product could be so complex that you’re unsure if your adaptation would deliver the required outcome, however that uncertainty is not sufficient to make a claim. The uncertainty should relate to the technical components within the architecture (eg would this language interact effectively with this other language), rather than originating from the team’s lack of overall knowledge of its own system.
Additionally, to ensure that you can clearly demonstrate that you overcame uncertainty, you should look to include information about the feasibility studies you ran. It might also help to demonstrate that the off-the-shelf solutions you considered could not effectively produce the results your team needed and that you, therefore, had to build something bespoke. You should also include information about the competent professionals in your team that helped make these decisions. There’s no clear cut guidance on this, and although HMRC’s additional guidance goes some way to clarifying what’s needed, we do recommend seeking some experienced advice on this particular point. Our team is happy to help with those questions.
Qualifying Activities and Costs
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 you maximise the amount of credit you receive:
One of the most common misunderstandings we see amongst claimants is the lack of scope of what constitutes R&D. The product work your team undergoes can qualify as well as the engineering work. HMRC recognises that R&D starts a long time before the actual build happens. That includes time spent assessing the technical feasibility, researching potential solutions, plotting the technical architecture, Q&A testing and other in-house product work done to enable the software developers to write the code.
Generally speaking, HMRC allows claims against the cost of in-house testing, but not for user-acceptance testing or beta-testing, where the customer is interacting with the new product or service. The reasoning behind this is that HMRC assume that the technological uncertainty has been resolved at the point the product is deployed and used by users. There can be exceptions, which we’d be happy to advise you on.
Only the hosting costs related to the R&D project can be claimed for. Identifying the hosting costs for R&D projects versus business as usual activity can get quite tricky so again we’d recommend speaking to our team on this point.
EmpowerRD was founded with the belief that too much government 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 worked with hundreds of software development companies to help them maximise their claim and receive their funds in record time (typically in 1-2 months). Read more about our work with our software development clients in our Case Studies, or get in touch to speak with one of our team.
RDEC Scheme Guide
The complete guide to compiling and submitting an RDEC claim. Includes an explanation of differences between the two schemes.
Government Funding Guide
A breakdown of the different types of government funding available to innovative businesses in the UK. Includes Coronavirus response funding.
Clarifying the Impact of CBILS on R&D Tax Credits
How the government's Coronavirus loan scheme affects your ability to claim.
Which costs qualify for R&D?
A breakdown of the types of costs that can be included in your claim.
EmpowerRD Covid-19 response
How we're helping businesses with their cash flow during the downturn.
Which scheme should I apply to?
Understand how your business's financial profile affects which scheme you need to apply to
Is my business eligible for R&D tax credits?
Find out if the activity undertaken by your business can qualify as R&D.
How much can I claim?
Read how different accounting positions can affect how much you're able to claim.
What evidence is required to make an R&D claim?
Learn about the different pieces of evidence required for different R&D costs.
The most common queries we hear about the R&D scheme.