Software development is an area of rapid change with research and development (R&D) related to it being eligible for tax credits given the nature and risk undertaken by the company. This risk could take the form of attempting to surpass the barrier regarding technological progress or ameliorating existing services which are present on the market. The government has intentionally kept the scope of eligibility for R&D tax credits relatively broad to enable appropriate compensation to be claimed by businesses who engage in the aforementioned activities.

Applicable areas include but aren’t limited to:

·        Data processing and storage technologies

·        Cloud computing

·        IOT

·        AI and Machine Learning

Companies are broadly segregated into 3 kinds for classification purposes:

Software development companies: These are entities which hire software developers to support other businesses in their software projects

Software houses: These are firms which generate software or train businesses in the use of software such as ERP systems

Businesses that develop software in-house: These firms work on unique kinds of software development projects

Software development projects which can qualify for R&D tax credits:

· Software which surpasses scientific or technological uncertainty: It is important that any solutions generated haven’t already been introduced by others and the data/knowledge gained isn’t just modified from that which is already available. It is necessary to keep a record of any problems faced by the business, how they were tackled and the final improvements which have resulted from creation of the software.

· Introduction of new software products or systems: This may involve speeding up a system or generating an application programming interface which didn’t previously exist

· Improving an existing product or system: This can’t be tailored just to a particular business but could include integrating existing systems to interoperate regardless of whether these systems are bespoke or not.

Kind of R&D costs which can be claimed as part of software projects

Multiple expenses can be claimed as part for tax relief purposes on an R&D project ranging from:

·Employees (internal or outsourced staff, even if they aren’t based in the UK).

· Any license fees.

·Consumables such as heat, light and power which is directly related to the R&D process.

·Prototypes developed for testing purposes

Employees working on the R&D project are also likely to vary across multiple departments or divisions and could include all the following:

· Senior Executives

·Project Managers

·Quality Assurance and testing specialists

·Software Engineers

·Developers

Perhaps also worth noting is the need for a dexterous individual with the technical competence in the information collection stage. This will increase the likelihood of the R&D claim successfully overcoming HMRC’s stringent inspection of the claim.

Finally, it might be worth spending time emphasizing some of the points raised above to avoid making an erroneous or undervalued claim, something many businesses have unfortunately fallen prey to.

1] Improvements to existing software counts: Don’t be stuck on trying to create a novel software if it’s not working for you and the project is just bleeding cash.

2]Uncertainty helps: If there the outcome to the work being carried out by your team or entity isn’t certain or involves an element of risk, this counts towards the claim since an unclear future involves financial risk due to the fact that the software might never reach its intended use or objective.

3] Payments to subcontractors based outside the UK can be eligible for the R&D credit so long as their work revolved around the R&D project or the proportion of pay relating to R&D can be extracted.

To conclude we thought it might just be worth mentioning what can’t constitute a part of your claim. This include any IT or software expenditure which is part of your day-to-day business, i.e., your operating activities. Aspects of the R&D project which are disallowed and thus must be excluded for the purposes of filing the claim include:

1]Beta testing

2]User acceptance testing

3]Initial market research

To optimize your R&D tax credit claims, contact Cheylesmore Accountants today. We can ensure you’re getting the right value for the money which you’ve invested since we understand the importance of innovation but also the need to manage cash flows to sustain systems and continue innovating.