R&D Tax Credits for Software
Software development has been central to the rise of the digital age, with increasing dependence on IT by both households and businesses, supporting strong expansion over the past decade. The UK’s software industry contributes more than £124bn to the UK’s GDP each year and directly supports nearly 700,000 jobs (2.2% of UK total).
Innovation lies at the heart of technology leadership and the UK has for generations been looked at as a leader in new technology, processes, and ways of working. But to maintain this, British organisations need to continue to proactively develop innovative software solutions and capitalise on the support offered by the R&D tax credit schemes.
Research & Development (R&D) tax relief is a government incentive established in 2000 to offer financial support to companies, with the aim of improving long term economic growth for the UK. It allows companies to claim an extra corporation tax deduction for qualifying R&D expenditure that can be reinvested back into the business. The scheme also gives loss-making businesses the option to receive a payable tax credit.
UK companies that perform high risk projects where success is not guaranteed while seeking the resolution of technical challenges might be executing qualifying R&D activity without realising it. Essentially, any UK company that invests in and undertakes development work to overcome a specific technological or scientific uncertainty could qualify.
The HMRC definition of R&D is broad and includes many day-to-day activities that software developers and IT enterprises take for granted:
“An R&D project, for tax purposes is one that seeks an advance through the resolution of scientific or technical uncertainties that are not deducible by a competent professional in that field”.
Does my R&D software project qualify?
As a minimum, your business must be based in the UK, subject to corporation tax and meet the viable ongoing trade requirement. There are specific rules that determine the eligibility of all R&D projects regardless of sector, industry, or business type.
Your R&D project aimed to resolve a specific technological or scientific uncertainty
For example, the project presents technical challenges that are not easily deducible or solvable by a competent professional working in the field. The competent professional should be uncertain as to the feasibility of the project objective, even after consulting all available knowledge and guidance. In other words, finding an answer or resolution should not be obvious or easy.
Your R&D project seek the advancement of knowledge
R&D projects that involve developing a brand-new product, process, or service typically qualify against this criterion so long as knowledge advancement is evidenced. It is worth noting that modifying or upgrading a product or service that already exists can attract R&D tax relief qualification. Even if your project fails or is abandoned, R&D tax credits may still be claimed so long as an advancement in technological or scientific knowledge was sought.
For more detail around R&D tax relief qualification criteria, please read our page about the importance of technological uncertainty.
What type of software projects can qualify for R&D Tax Credits?
Many of the software development R&D claims we process are for companies for who software development is not their main trade. HMRC encourages all types of eligible business to apply for R&D tax credits irrespective of size, turnover, or sector so long as their software project meets the criteria.
There is no hard and fast rule to determine the eligibility of your project. However, common examples of software development projects that may qualify for R&D tax relief include:
- state-of-the-art custom software for new projects, or new functionality for existing R&D projects
- tools to extend the functionality of operating systems and software applications
- software development tools (e.g. for inter-platform data processing, system integrations)
- sophisticated data management techniques, such as new data structures and analytics tools
- innovative methods of capturing, transferring, processing, and protecting data
- software to run new computer hardware
- software to run on devices with pre-installed operating systems, such as handheld GPS, mobile phones, and tablets; or,
- new methods of integrating hardware and software platforms.
- developing neural networks including AI and machine learning
- algorithm design
- blockchain and firmware development
The above examples are simple criteria that do not automatically qualify a project and instead are indicative of the types of projects we commonly see.
Benefits of claiming R&D Tax Credits
The funds proactive businesses receive after successful R&D tax relief claims can be reinvested in a multitude of ways. Many businesses have reported that savvy reinvestment has had a transformative effect on their business’ competitiveness and their ability to innovate. Companies could be at a competitive disadvantage if they don’t utilise the relief.
Although not exhaustive, the below examples illustrate some of the main ways engineering businesses reinvest their R&D tax credit entitlement.
- Fund more R&D activity – the funds from HMRC could be reinvested back into R&D projects, thus continuing a cycle that will support ongoing R&D tax credit claims in the future.
- Accelerate business plans – reinvest into site expansion or new facilities (e.g. new office or R&D laboratory) or fund the creation of new product, services, and processes sooner than expected.
- New plant or equipment – fund the missing piece in increasing your efficiency and productivity. This could be upgrading IT infrastructure, installing a brand-new production line, procuring machinery, or updating phone systems.
- Recruit new talent – strengthen your talent pool and competitiveness by investing in new technical engineering expertise, whether that be apprentices, technicians, or senior engineers.
- Improve credit rating – thereby reducing costs of supply.
- Increase company sale value – for those organising an exit strategy and future sale.
Why use Cost Care Tax for your software R&D tax credit claim?
Since the launch of the scheme in 2000, we have successfully reclaimed millions of pounds in R&D tax relief for several hundred UK businesses undertaking software R&D projects. Our highly skilled team is trusted by many accountants and businesses to provide specialist advice they can count on.
Each client can be confident that Cost Care Tax will work tirelessly to maximise claims while complying with HMRC eligibility requirements. Our fees are inclusive of any liaison with HMRC which may be necessary to ensure a successful outcome and you will only be liable for payment of our fees following a successful claim.
- Your claim managed from start to finish by our team of tax specialists.
- Dedicated Key Account Manager to assist you every step of the way.
- Maximise your R&D claim by identifying qualifying software projects and eligible expenses.
- Write market-leading technical reports to present your R&D activity to HMRC.
- We manage all interaction with HMRC so you don’t have to.
- No claim – no fee charging structure with no nasty surprises.
- Always up to date with the latest HMRC guidelines.
- Established in 1995 – strong track record working with 1000+ accountants to maximise the value of R&D tax credit claims.
If you would like us to start working on a claim for you, please get in touch and speak to one of our friendly advisors for a free, exploratory assessment of your R&D projects.
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