Software Development and R&D Claims 101
R&D tax relief claims are a confusing topic at the best of times and can be even more so for software, app and web development businesses. Whereas businesses in other sectors undertaking eligible R&D have many types of expenditure to support their claim, software businesses often have few-to-no hard costs other than their staffing bill. Consequently, many business leaders in the software space are unsure about their eligibility for claiming tax relief on their expenditures and they often have to go to greater lengths to provide insight into their thought patterns and justifications behind the activities they have undertaken.
TL; DR – to successfully claim tax relief on your software R&D projects, HMRC guidelines indicate they want to see evidence of the technical and developmental work that has gone into the project, as opposed to the functions or features of an app. Logically, this makes sense – features and functions often only exist as ideas, but it is the technical and developmental work behind them that is important and that brings them to life that HMRC want to dig into.
Software-related activities might qualify as research and development in two main ways:
- to achieve the desired R&D objective, and
- as a core objective of the R&D project
Software as a means to achieve the desired R&D objective
If software development was used or deployed for the advance of a wider R&D project, then it should be an eligible part of your claim for tax relief.
In this instance, the wider objective of the R&D project must be one that is advancing science or technology (see our article on the definition of R&D for the purposes of reclaiming tax relief), but the creation of the software itself does not have to be evidence as a significant advancement in science or technology, because the wider R&D project ticks that box. If the wider project does not classify as an eligible piece of R&D, then none of its associated costs can be claimed for tax relief.
Software development as a core R&D objective
If the core objective of the R&D project is to develop eligible software, then the same guidelines as highlighted above will apply in that it needs to be a demonstrable advance in science or technology.
In this instance, the software development and coding work undertaken does need to pass a higher threshold, as it needs to be sufficiently well researched and developed in that it must demonstrate an advance and could not have been solved through relatively simplistic research or by using a professional in the field.
R&D for software development is a complex topic
One of the most common questions we hear relates to what transpires to be routine adaptations or iterations of existing software, apps or coded solutions. This would not be eligible for R&D, as the difficult or complex work would have A) already have been done on the product or service or B) would not have been eligible for R&D in the first place, and so this additional work will not be eligible either. In short, routine development would not classify as R&D.
In addition, some software projects may not qualify in their entirety, depending upon whether the overall project demonstrates an advance in science and technology or just stages of it. For example, if you have created a new app that cost your business £100,000, £65,000 in software engineering time and £35,000 in commercialisation and marketing. Only the elements of the project that resolve technological or scientific uncertainty will be eligible for R&D tax relief, so in this case the £65,000 of development work; the £35,000 of marketing might not be eligible.
Commonly eligible software activity
So, we can see that software eligibility for R&D tax relief is far from clear-cut. The range of costs that could be eligible for tax relief, however, is extensive:
Investigation of
- New programming languages
- New operating systems
- Algorithmic advancements
- New or improved query languages
- Theoretical computer science
- Encryption or security
- Conflicts with hardware and software
- Artificial intelligence
What about design and UX/UI?
While many hours of research and investigation go into modern UX/UI methodologies and concepts, HMRC generally does not consider it an eligible R&D activity if the project focuses exclusively on user interface and design aesthetics. However, improving performance and overall capabilities could be eligible if the conditions above are satisfied.
Improving your chance of successfully claiming R&D tax relief
Of critical importance is the need to train your software engineering and development teams as to what constitutes eligible R&D and what doesn’t. There needs to be clear communication between finance, development, and management for a claim to be successful, so training your team around these principles and helping them understand what is and is not accepted by HMRC will help your chances of success in the future.
We’ve also written a blog here about how to improve your chances of successfully passing your R&D claim and ensuring it does not get flagged for additional review, so check that out.
Inviting them to maintain detailed activity records can also greatly improve your chance of submitting a successful claim, including briefing documentation and specification sheets, logs of research undertaken and why various steps have been taken will all help HMRC to establish if your project really is demonstrating a technological advance, or if it is undertaking work of a routine nature.
We’re only a click away
R&D in the software sector is more challenging than most people understand; even those who’ve been in the industry for decades can struggle to understand what HMRC will and will not allow in a tax relief claim. Allow us to review your activity and future claim, and you can get on with doing what you do best.
Happy developing!
