R&D tax credits for software development

What qualifies as R&D in software development?

As software plays an increasingly important role across all industries, successful claims are not limited to just creating new products. While the scope of qualifying activities is intentionally broad, understanding whether your project qualifies can be tricky and many businesses often miss out on significant savings, or worse, end up with protracted claim checks. These are some examples of the range of activities that can qualify:

• Creating end-to-end SaaS systems that incorporate advances within the core technology stack
• Developing algorithms onto real hardware and enabling scalable processing speed
• Developing data analytics that goes beyond standard methods or techniques
• Developing high performing modelling or simulation tools
• Developing new architectures or forms of machine learning
• Extending software frameworks (e.g. software development kits, or software libraries) beyond their original design
• Integrating disparate technologies where there are fundamental challenges with components communicating 
• Replacing existing technology with a new architecture (i.e. moving to micro-services)

HMRC pay particular attention to the speed at which software evolves and uses its own computer specialists to assess claims. At the moment, we're seeing a large number of software claims being challenged in HMRC’s compliance checks. HMRC is using the argument that a lot of technological developments, such as AI and Machine Learning, use known technologies. Therefore, you need to ensure your claim is keeping up with changes and still meets the needs of HMRC. It’s always worth having a conversation with one of our advisers to understand how your software project fits within the R&D legislation.

We take time to listen to your business to understand the goal you’re trying to achieve with your innovation, so we can help you overcome problems and challenges along the way. By being open and honest, we aren’t afraid to challenge our clients to make sure that your claim is correct, and you’ve optimised the benefit. In case of an enquiry, our expert advisers have experience dealing with HMRC to help you navigate the changing R&D rules and protect you from an HMRC enquiry. Our highly qualified team will work with you to prepare your R&D claim. We want to help you understand your eligible activities, without holding you up, so you know how to build a robust R&D claim.

Can I qualify for software development R&D tax credits?

Any business undertaking software development should explore the possibility of a R&D claim. Companies we’ve prepared eligible software claims for include:

Costs that you can include in your R&D software development tax credit claim

The R&D tax credit scheme allows you to claim revenue expenditure that has been expensed to the profit and loss account and is considered allowable as a deduction in calculating profits. 

In reality, it’s fairly common for companies to capitalise their software development expenditure as an intangible fixed asset. In this instance, the s1308 allows you to claim this capex when it’s considered revenue in nature. To be considered revenue, the development should involve feasibility and the software should be evolving as challenges are identified. Therefore, there should be an expectation that the current code does not necessarily represent a final working model giving an enduring benefit of over two years.

The main categories of qualifying spend that can be claimed are:

• Certain utility costs
• Consumable Items
• Data and hosting costs
• Externally Provided Workers (Agency staff or from other group companies)
• Software licenses
• Staff Costs (employees and directors)
• Subcontracted R&D
• University payments

Areas to be careful of

• Overseas costs as the use of these resources may limit your claim.

Adding it all up – what’s the benefit?

If your software company is a SME and is profit-making, an R&D tax relief claim will decrease the amount of tax you have to pay. Whereas for a loss-making SME, a cashback payment may be available. The benefit as a proportion of qualifying spend for a profitable business is 21.5% whereas the cashback is up to 19% of qualifying costs for a loss-making business. Businesses that qualify as ‘R&D intensive’ can claim an increased benefit where the cashback is up to 27% of qualifying costs for a loss-making business. 

If your company is considered a large company, an R&D claim will increase the profits within the business at a rate of 20% of the qualifying spend. This credit will then translate into a reduction in tax paid or cash back at a rate of 16% of the qualifying spend. Therefore, this scheme can impact measures such as Earnings Before Interest and Taxes (EBIT) as well as providing a welcome cash injection into the business. From 2024 all non-R&D intensive SMEs will move onto a common RDEC scheme with benefits as per the large company scheme.

Other incentives available to software companies

Businesses using and developing tech solutions should be looking at all R&D incentives. Initial development work can be supported with R&D tax credits and grants. Research and Development Allowances (RDA) are also available for capital spend on large-scale implementation. Therefore, R&D incentives can support your business through the IT development lifecycle.

Whether it’s for developing a new product or investigating a technology solution, applying for a grant can speed up internal developments. But many businesses find identifying the right grant option and the application process daunting. We’ll provide you with realistic advice and support through the application process. Our approach is to assist our clients where we can add value. You understand how your business works better than anyone, we know how to translate your knowledge into a project proposal that will impress the grant awarding body.

How Buzzacott can help with your R&D tax credit for software development claim

We’ll support you with preparing and claiming R&D tax credits. Once appointed, we’ll:

• Identify what scheme your business qualifies for
• Carry out a comprehensive review of your R&D activity, working with you to ensure you are maximising your claim
• Prepare a claim that minimises your potential exposure to a HMRC enquiry
• Aim to fast track your claim and avoid delays in receiving your benefit
• Guide you through the whole claim process or on certain aspects of the claim.

We also work with you to assist in identifying other sources of R&D support and help with planning your R&D strategy, considering incentives and grants that might be available. By offering this holistic view of the innovation support needs, we can assist throughout your business lifecycle. Our R&D team at Buzzacott supports businesses throughout the year, not just when it’s time to prepare the next R&D claim. 

We take time to listen to your business to understand the goal you’re trying to achieve with your innovation, so we can help you overcome problems and challenges along the way. By being open and honest, we aren’t afraid to challenge our clients to make sure that your claim is correct, and you’ve optimised the benefit. We want to help you understand your eligible activities, without holding you up, so you know how to build a robust R&D claim.

Download our R&D tax credit guides

• Are you maximising your R&D tax credit claims?
• How likely is your R&D claim to be queried by HMRC?

Get in touch

If you would like to speak to one of our R&D experts to find out more about how we can help, please get in touch via the form below or call +44 (0)20 7710 3330.