R&D Tax Claims for Software Projects
A while back, I wrote a blog about a client who’s accountant had filed a claim for software development. Their activities were totally ineligible, as they weren’t sufficiently technically challenging.
I’ve just got back from a claim meeting with a new client who develops software. It’s great to say that the HMRC guidelines are now clearer than ever. They act as a great benchmark for assessing your individual software projects and activities.
In our general guidelines we’ve adapted the HMRC terminology to make it clearer for a broad audience. But when it comes down to software, their wording hits the nail on the head.
Much of this blog as lifted directly from HMRC’s guidelines. For this, I make no apologies.
The general guidelines for a successful R&D Claim
Before we proceed, let’s take a look at the general guidelines. We always ask the following 3 questions about their eligible activities:
- Have you attempted to overcome a difficult technical problem?
- Have you sought a genuine “technical advance” – not just an improvement to your own company’s knowledge, or an “innovative application” to your business sector?
- Did the project involve an uncertainty that another “competent professional” in the respective field couldn’t easily resolve with information readily available to them?
However, software projects often lead to ambiguity, as even these questions can have grey answers.
Specific conditions for R&D Tax Claims for software projects
Because of the pace of change within the software industry, HMRC employ specialist software case managers. These people ensure that HMRC’s knowledge of the industry is kept updated. This results in software claims being fairly and accurately assessed, when selected.
This is important when defining your own projects. If they don’t meet the criteria detailed in HMRC’s guidance document (repeated in this blog) they will be rejected.
Qualifying Software Projects
There are two ways in which expenditure on the creation of software can qualify as eligible R&D.
The first is defined as: activities within an R&D project to create or adapt software needed to resolve the scientific or technological uncertainty, provided that the software is created or adapted solely for use in R&D.
So here, we’re taking about software which isn’t necessarily groundbreaking in itself, but is required as a part of a larger R&D project (which meets the criteria).
Pretty straightforward. Now, onto the part which is most interesting for software companies:
The second area defines the requirements for the development of software which is the primary goal of the R&D project. This one’s a little more complicated…
Software as the primary goal for the R&D Tax Claim
Firstly, we need to clarify that it does not matter whether the software project is intended to result in a product to be used in-house, licensed or sold. There are three key factors to consider which ALL need to be considered when identifying an eligible R&D project:
1) What advance in science or technology is this project seeking to achieve?
An advance in science or technology means an advance in overall technical knowledge, not a company’s own state of knowledge or capability alone.
This is the punchline:
The advance may also be an appreciable improvement to an application of software provided these changes or adaptations to the scientific or technological characteristics would be generally acknowledged by a competent professional as a genuine non-trivial improvement.
The implementation of a novel algorithm that represents a significant increase in overall capability in the area of software can also be R&D, However, routine adaptation of an existing product or process is not R&D.
Improvements, optimisations and fine tuning would only be R&D if there has been a genuine and non-trivial improvement in the underlying technology.
To help with this, you should be able to define:
a) What is the baseline in technology that any advance sought is being measured against?
b) What was the gap in technological knowledge or capability which necessitated the commencement of the R&D project?
c) What technological changes have been made in seeking a technological advance, or attempted advance?
2) What are the scientific or technological uncertainties?
What matters is the technological input, rather than the commercial output. To help ascertain the technological uncertainties, consider the following:
a) Identify the challenges accurately
b) Ask yourself: What was it about the technology that made it uncertain whether software could be made to do what the company wanted it to do? What would be the typical approach that would be applied to resolve each particular technological uncertainty?
We always say “strip away the application and look at the technology”. HMRC clarify this in a different way, suggesting that you recognise what technological input is being introduced, rather than describing what different commercial functionality or output was achieved.
3) Project boundaries
Most projects for the development of a commercial product will go further than resolving technological uncertainties and so will not qualify as R&D in their entirety.
This reaffirms that in most cases, an entire project won’t be eligible. You need to identify when the technical uncertainty has been identified (your starting point) and the point at which it was resolved or ceases (your end point). Your eligible activities are what happens within this period.
Summary: Think carefully when developing your R&D Tax Claims for Software
We do see a high number of ineligible claims being processed by people who don’t sufficiently understand the rules for software projects. If you would like any help identifying your eligible spend, please don’t hesitate to call us.
For more information on Research and Development Tax Credits or our Radar365 programme, please contact firstname.lastname@example.org or click on the links below:
About our R&D Tax Claims service: RandD Tax Claims – About R&D Tax Credits
About Radar365: R&D Tax Claims – Radar365 Annual Support
HMRC’s page about R&D Tax Credits: https://www.gov.uk/guidance/corporation-tax-research-and-development-rd-relief