R&D tax & software
Research and development (R&D) tax relief is a UK tax incentive to reward companies investing in creating new or improved products. Spending money on such products results in a proportion of that cash being given back.
If your business is involved in software development, there is a good chance you could be benefiting significantly from R&D tax credits. Taking advantage of the government’s R&D tax incentive for your development can enable you to take more risks and grow your company.
What qualifies for software development?
What qualifies for R&D is very broad by definition. If your company is attempting to resolve a technological or scientific problem then you may be carrying out R&D. You might be improving an existing product or developing a new product or service.
Here are some common areas involving qualifying software development:
- E-Commerce
- A.I
- Cloud computing
- FinTech
- Cyber security
- Data technologies
- Robotics
- Automation
What costs can be claimed as part of software development?
There are many areas of expenditure that can be claimed as part of your R&D project, spanning from subcontractor costs to consumable and utilities costs.
Costs typically claimable within software development projects include:
- Staff costs
- Outsourcing such as subcontractors and externally provided workers
- Materials
- Software licensing
- Consumables such as light and heating
- Prototypes, where created to test
Misconceptions around software development and R&D tax relief
There are always misconceptions regarding R&D tax. Because of this, some companies do not make a claim when they may be eligible to do so. In this section we will go through some common myths we have heard when dealing with software development claims.
- We used externally provided workers and subcontractors
The use of subcontractors or externally provided workers does count as qualifying expenditure within software development as long as the work they perform contributes to the R&D.
- Only new software qualifies
False. Even if software already exists, improving existing software and overcoming challenges counts towards genuine R&D. A competitor may already have the development you seek, however this information will not be available to you, therefore the R&D activity qualifies.
- Part of the project was not R&D
If a project obtains standard elements within it, but has new elements implemented, this will still qualify as R&D. Projects which only have minor adjustments or fixes will not qualify.
- Not taking a financial risk
One criteria of qualifying R&D projects is that there must be uncertainty in the outcome. In other words, you do not know whether the project will be a success. If there is uncertainty present within your project, you will be taking a financial risk and therefore, may qualify for R&D tax credits.
What type of software projects qualify?
A large majority of qualifying software projects incorporate similar activities. To help understand possible qualifying projects, here are some potential R&D projects within different types of software development.
(On website - these should be drop down buttons so they have to click on the extension tab to read more if they wish to do so.)
Potential R&D projects in cloud computing
- Development of new, improved or bespoke cloud computing technology
- Development of cloud tooling
- Development of cloud storage solutions
- Data integration using new or improved methodology
- API development
- Software and hardware design, development and testing
- Scalability to improve speed and efficiency of the system
Potential R&D projects in e-commerce computing
- Development of data integration using innovative or improved methodology
- API development
- New, improved or bespoke security measures or software
- Compatibility development
Potential R&D projects in cyber security
- Creation and development of automation in the form of cyber security technology
- Development of new, improved or bespoke cyber security software
- API development
- Advanced data analysis technology
Potential R&D projects in AI computing
- Development of smart and innovative AI programming
- Development of data integration and compatibility advances
- Development of AI image analysis
- Bespoke AI design on automation services
- API development, integration and testing
Potential R&D projects in FinTech
- Development of bespoke automation tools or software
- API development
- Scalability to improve speed and efficiency of the system
- New, improved or bespoke security measures or software
- Compatibility development
Potential R&D projects in data technology
- New, improved or bespoke data analysis tools
- API development and integration
- Innovative data security
The possible 2023 update to HMRC guidance?
Tax relief is a key feature to the UK tax system and R&D tax relief is designed to support government policy by encouraging businesses to invest in research and development.
At the Autumn Budget 2021, the government confirmed qualifying expenditure will expand to include data and cloud computing costs.
The following categories will be brought into the scope:
- License payments for datasets
- Cloud computing costs that can be attributed to computation, data processing and software
The guidance not only supports more qualifying expenditure for software companies, but also other sectors that carry out this expenditure.
The government will publish draft legislation in the summer of 2022 and invite stakeholders on their views of the upcoming implementation of these measures. The legislation will then be included in Finance Bill 2022-23 and take effect from April 2023.
The review is not concluded and may be subject to change.
Benefits of R&D tax relief for software companies
For the majority of companies who claim R&D tax relief, the impact the incentive has is impressive and transformative to how businesses grow. Besides the injection of cash that can be obtained, the relief helps businesses achieve a culture of innovation, regenerating a cycle of positive growth year on year.
Software and IT companies in the year ending March 2020 made up 22% of the total amount claimed. However, it’s not just pure IT or software businesses who qualify. There are many other types of businesses who could potentially claim R&D tax credits, if they have developed software to overcome uncertainties. Many of our clients who claim R&D tax relief use the source for growing their businesses in the form of hiring new staff. The beauty of the incentive is it can be spent on whatever you wish to spend it on.