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 draft-in their own tech team to assist them with some software development claims. As a result of these challenges HMRC have updated their guidance on software development claims to help their team, advisors and claimants guarantee clear and fair claims in this area.
For reference, that updated guidance is listed here on the 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 software development projects. We’ve broken down our insights into the three following categories:
- Advance in science and technology
- Overcoming uncertainty
- Qualifying activities and costs
Advance in Science and Technology
For all R&D claims, HMRC requires that the project represents an “advance in the field of science or technology”. Within the realm of software development that has significant implications. Firstly, 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 at the service of a greater R&D project which is itself an advance in its field, or the creation/adaptation of the software required an 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 field HMRC emphasise the need for the uncertainty to be at the technological level and not at a system or organisational level. For example, the architecture of your application 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 understanding 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 included. It might also help to demonstrate that the off-the-shelf solutions you considered could not effectively produce the results your team needed. 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 expert 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 costs and activities.
One of the most common misunderstandings we see amongst claimants is the lack of scope of what constitutes R&D. Product can qualify as well as development 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 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 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. Get in touch to find out more.
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