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Can software developers claim R&D tax relief?

Author: Tom Mason

If your clients include software developers or providers, then it’s likely that you’ve come across this question since this cutting-edge sector blurs the lines of what can be classed as qualifying R&D.

It isn’t often clear when software development qualifies for R&D tax relief and when it does not, partially because the scheme employs multiple criteria in its definition of R&D, and software often meets some but not all the requirements.

You may have found this leading to clients who submit ineligible claims or those who avoid submitting, when their work qualifies as relevant R&D activity.

The distinctions between qualifying and non-qualifying software development, and relevant qualifying expenditure, are often small and nuanced. Our experts are here to support your firm and its R&D tax offering with some clarification.

Is it innovative?

Software development certainly, in broad terms, meets the requirement of projects within science and technology.

However, there is then the requirement that the project must be innovative and contribute to the overall knowledge of a particular subject area by:

  • Looking for an advance in the field
  • Overcoming or trying to overcome a scientific or technical uncertainty
  • Contributing knowledge not already held or easily worked out by another expert in the field

This is where your clients in software development might trip up. Under the R&D tax relief scheme, software development in itself is not classed as qualifying innovation.

To qualify for R&D tax relief, a software development project must seek to advance the field of computer science, software engineering or a related sector.

It cannot, for example, solve an issue only facing your client’s operations, or apply an existing solution in a new context.

This concept is not well understood in industry, so you will need to communicate this thoroughly to clients seeking to claim R&D tax relief for software development.

When does software development qualify?

The latest Government guidelines offer two routes for software development to qualify for R&D tax relief:

  • To be the end goal of an R&D project
  • To be adapted or created to solve a wider uncertainty

As we’ve said, if a project clearly addresses or solves an uncertainty within the software development or computer science sectors, whether it is intended to be sold or not, then it will likely qualify for R&D tax reliefs.

Alternatively, a software development project might be part of a wider R&D effort.

The development may qualify as part of the R&D project if it adapts or creates a software or digital tool solely for use within that project, which in turn must address a scientific or technological challenge.

Additionally, for the first time, cloud computing and data costs are explicitly classed as qualifying expenses for R&D tax relief claims.

Under these circumstances, your client may be able to submit a claim if they can demonstrate sufficiently that the development makes a genuine qualifying contribution to the wider field.

Support for your clients

Software development remains a growing sector but one which often causes businesses and their accountants difficulty when it comes to R&D tax relief claims.

We can help you to take your R&D tax offering to the next level, with expertise crossing a range of sectors allowing us to take a view of each individual claim and provide you with bespoke advice that translates to successful claims.

For further advice on R&D claims for software developer clients, please contact us and speak to a member of our team.