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Software Development R&D Tax Credits

R&D Tax Credits are available to software developers making technological advancements and pursuing innovation. Through the government’s R&D Tax Credit scheme, companies can benefit from Corporation Tax relief or cash credits.

What qualifies as software development R&D activities?

Eligible R&D activities in the software sector include:

  • Developing new algorithms and software
  • Overcoming technical issues relating to compatibility, stability and scalability
  • Enhancing new and existing systems via reverse engineering
  • Undertaking bespoke projects with innovative solutions
  • Effectively responding to changes and updates in the software development industry
  • Identifying cyber and data security improvements

Software development is the project goal

Qualifying software R&D activities can be identified by considering the guidelines established by the Department for Business, Energy and Industrial Strategy (BEIS) in CIRD81900.

Formerly known as the DTI Guidelines, CIRD81900 states that R&D, for tax purposes, takes place when a project seeks to achieve a scientific or technological advancement. Any activities that directly contribute to realising this goal through the resolution of uncertainty are considered R&D.

Subsequently, any activity that is dedicated to creating or enhancing innovative software may be considered R&D activity. This encompasses solutions that are intended to be used as an in-house function, as well as products that will be licensed or sold.

Software can also qualify as an R&D project if it serves a wider advance in science and technology and contributes to a larger goal.

Evidence of developing software to resolve scientific or technological uncertainties

Naturally, when you claim R&D Tax Credits, you will be expected to provide evidence that you did attempt to resolve scientific or technological uncertainties through software development.

The core objective of providing evidence is to show any of your achievements were the result of planned R&D activity and not a solution that was stumbled upon.

Important data that you should consider recording throughout the duration of your R&D project include:

  • Timesheets and expenses: Record any outgoing costs related to research and development, whether it is the value of materials or staffing expenses
  • Project log: Maintain a comprehensive project log, highlighting your initial goal for any work you undertake and observations you make throughout
  • External work: Keep track of any external collaboration, whether that is temporary staff or work with agencies operating in the same field

Software development R&D Tax Credit project boundaries

When undertaking software R&D activities, it is wise to be aware of the project requirements and boundaries. All analysis and design work must be dedicated to the purpose of resolving uncertainties and achieving technological advancements — any activity not working towards these goals is not eligible for R&D tax relief.

Additional considerations include:

  • Planning elements of the project are considered qualifying expenditure, whereas marketing, finance, legal and other non-R&D aspects are not
  • Testing that can qualify as R&D expenditure should feed back into development and not validate work once technological uncertainties have been resolved
  • Non-functional testing, including early integration tests which feed back into overall development, can in included as R&D; however, non-functional tests that are performed for confirmation should be excluded
  • Post-development, the transfer of software cannot be included as R&D once uncertainty is resolved; however, subsequent maintenance which identifies new R&D opportunities can recommence tax relief

What are technological advancements in software R&D tax credits?

In software development, technological advancement refers to progressing knowledge or capability in the industry — not just a single company.

Excluding simple or trivial changes, an advance is considered a genuine improvement to an application of software.

What are technological uncertainties in software R&D tax credits?

In software development, technological advancement refers to progressing knowledge or capability in the industry — not just a single company.

Excluding simple or trivial changes, an advance is considered a genuine improvement to an application of software.

How do I claim R&D Tax Credits for software development?

Before claiming tax relief via the GOV.UK Company Tax Return form, you must first check if you are required to notify HMRC in advance of your claim. There are multiple scenarios when you do have to inform HMRC, such as if it is your first claim or if your last claim was more than three years ago.

You must also submit detailed information to support your tax relief claim, including:

  • Company details
  • Contact details
  • Accounting period confirmed
  • Qualifying expenditure breakdown
  • Indirect qualifying activities

Additionally, you must provide an overview of your projects, detailing the technological uncertainties your software company faced and how your project intended to overcome these.

Whilst claiming R&D Tax Credits appears to be a daunting process, an agent acting on behalf of your company can submit the claim.

randd has unparalleled experience in the software development industry, claiming an average of £50,000 on behalf of our clients.

Do not hesitate to get in touch with randd and we can start preparing your R&D Tax Credits claim today.

Software companies we’ve helped with R&D tax credits

Throughout our history, we have helped an array of software companies apply for R&D tax credits and be rewarded for their innovation, such as the following:

To see more examples of our R&D success in the software sector, please see our Case Studies.