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Are you aware of the new HMRC software guidelines?

Many businesses are investing in IT or software development and subsequently could be eligible to claim R&D tax credits. However, we’ve found that many firms are unaware of the new HMRC software guidelines and are therefore not clear on which of their projects are eligible.

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The guidelines have been released to clarify where HMRC see the boundary between routine software coding and eligible R&D. Understanding this new guidance is the key to a smooth eligibility assessment process and submitting successful claims. At our recent roundtable, the mention of this new guidance sparked lively discussion.

What are the new software guidelines?

There has been confusion in the sector as to whether challenging software suits the criteria of an advance in science and technology. The aim of the new guidance is for HMRC to highlight where they expect to see the boundary between eligible work and non-qualifying activities within R&D tax credit claims. The key take away from this document is that HMRC are concerned with claims that focus on functions and features of the product rather than what has been developed to achieve this functional capability. 

How will this impact your R&D tax credit claims?

The guidelines show the importance of digging into the technical work when reviewing your projects, rather than focusing on the functions and features, so you should be looking at the code generated within your projects while completing your eligibility assessments. Your software specialists will need to understand the R&D eligibility criteria and be involved in your claim preparation process in order for you to be successful. In our experience, this is where claims fall down for many businesses because of the lack of communication between the finance team and the specialists. 

To avoid this error in your claims, our software experts are on hand to help with the translation of the R&D guidelines into the language of your software developers. This is for ease of their introduction to the scheme and to highlight the importance of their involvement in the claiming process. Contact us via the form below for more information. 

How to apply the guidelines to your software projects

There are case studies included in the new guidelines with examples of how to apply the eligibility criteria to your software projects but they are fairly generic, so when we discussed the guidelines at our event, we delved in deeper and provided some context. In particular, we discussed how the guidelines might translate into an agile project with multiple short duration sprints. 

In terms of the sprints, the same principle applies that you need to review the technical aspects of the work not the function or feature being developed. In agile development language, each sprint has a story that describes the feature to be created, so reviewing at this level isn’t beneficial to your claim. In addition, each sprint covers a very small part of a bigger project and can contain minimal technical input. We suggest reviewing at a level above these sprints during your eligibility assessment, to ensure you review the broader enhancement being developed - quite often, this next level up is called an EPIC.

What is the guidance for web development (UI and UX) and software upgrades?

UI presents a range of challenges, from human factor issues around usability and layout, through to providing functionality in the form of buttons and menus, and including technically complex image and data compression algorithms to maintain performance. HMRC’s new software guidelines confirm that work focused exclusively on the look and feel of the interface is unlikely to be eligible, while improving the performance capabilities could be eligible. 

At the roundtable, we discussed a number of cases in between these UI extremes and explained how the assessment needs to review the project holistically to identify which aspects of the development qualify. I then answered some FAQs in terms of eligible software developments and we discussed the difference between eligibility assessments for agile development and waterfall development.  

Other topics covered

Now that our roundtable guests were up to date with the latest guidance and felt more confident about which of their projects could be eligible for R&D tax credits, we moved on to cover EPW (externally provided workers) versus subcontractors, the R&D tax credit advance assurance scheme and what HMRC are looking for in software claims. It was great to make some new connections and be able to give these businesses confidence when it comes to R&D so they can improve their claims and use the credit to keep investing in future. 

If you have any questions on the new HMRC software guidelines, would like to attend our next event, or if you would like more information on R&D tax credits, please get in touch.

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