R&D in Software Development: The Complexities of Claims Uncovered
As everyday processes become increasingly digitised, businesses continue to invest in software development and IT to evolve and streamline how they operate. This has without a doubt become a priority for many businesses when responding to COVID-19, as they’ve need to cleverly, and rapidly, adapt their systems to overcome sudden challenges produced by the pandemic.
Needless to say, if your company has sought technological advancements relating to software that is central to your business, or it’s something you’ve needed to invest in to improve processes or services, it’s likely you could qualify for HMRC’s generous R&D tax relief scheme.
But despite the huge scope of software development R&D tax relief, this sector can still be a particularly challenging area for those at HMRC assessing the claims, and R&D advisers alike. The difficulties lie in consistently defining where software development R&D starts and ends, and proving the eligibility behind the advancements. When misunderstood, it can ultimately result in both under and over claiming (or in a worst-case scenario, HMRC might not agree your project is even eligible).
Due to the confusion in this sector, HMRC also uses its in-house IT experts to review claims. With a high level of scrutiny around R&D around software, seeking an expert opinion for these types of claims can be crucial for backing projects with all the necessary supporting details.
What software development counts as R&D?
In our experience, we’ve found that many cases of software development R&D claims are for companies where software development isn’t their main trade. In the case of R&D tax, it’s not the type of business that’s important or whether the software project is intended to result in a product to be used in-house, licensed or sold. What matters is the technological input rather than the commercial output, and there’s specific areas that need to be covered.
A robust R&D claim will outline the development or integration of software, considering the advance that’s being sought and the technological uncertainty and boundaries around the R&D.
What advance in science or technology is this project seeking to achieve?
Rather than just advancing the company’s own knowledge, the work undertaken needs to provide an overall advance in industry capability, against presently available knowledge. The claim should explain the baseline technology at the time of the R&D, the gap in technological knowledge or capability which required undertaking R&D, as well as outlining the technological changes that have been made in seeking or attempting the advance.
What are the scientific or technological uncertainties?
A key part of preparing a strong claim is accurately outlining the challenges that were faced. You’ll need to clearly specify what it was about the technology or computer science that produced an uncertainty as to whether software could be made to do what was intended. The claim will also need to demonstrate how it wasn’t the case of simply adapting freely available knowledge to resolve the uncertainties, and that these challenges hadn’t been overcome by a competent professional.
Clear identification of the boundaries: where does the R&D start and end?
For tax purposes, R&D starts as soon as work begins to resolve a scientific or technological uncertainty and finishes when the uncertainty is resolved, or an attempt to find a solution stops.
What about improving an existing product or system?
R&D can often seem straightforward if a project embarks on the introduction of entirely unique software products or systems, like finding new ways to integrate different technologies that don’t typically interoperate. But it’s not true that only new software qualifies.
Even if the software currently exists, improving existing software and overcoming unique challenges is considered as valid R&D – it can also count even if a project fails. But you’ll still need to demonstrate how your software development improved the capability of an existing product or system.
Exploring your company’s software development R&D
Unsure whether your activities qualify? We’ve secured many R&D claims for clients where software development is all they do, or it’s just one aspect of their business they’ve sought to advance.