You don’t have to be an actual software company or house to claim R&D tax relief for software development. Any type of business that develops software has the same entitlement. The same R&D tax relief rules apply across all industries for exactly this reason. If your business develops software to resolve a specific issue for you, then it is likely to be eligible for R&D tax relief.
What are the main qualifying criteria?
The qualifying criteria for software development R&D tax relief claims are exactly the same as those in any other industry. The new government guidance lays out some clearer specifics, as we explained in our previous blog article.
Our main tips for working out what qualifying criteria you meet are:
- You can be inventing a new software product or making an existing product better in a new way.
- HMRC’s ‘overcome a scientific or technological uncertainty’ is a purposefully broad umbrella. In the case of software development, this means that you are creating a new pathway to your goal. As opposed to using readily available knowledge in a new way. Your claim will need to include an explanation of how the problem is solved by your software development. Or, at least, your intended resolution. One of the great things about this tax relief is that your software development project does not have to come to a successful conclusion.
- You need to be creating new knowledge in your field. This is obviously linked to the previous point and satisfies HMRC’s ‘making an advance in overall knowledge’. It needs to be something that isn’t already known by other software experts and isn’t just limited to your business.
What doesn’t qualify for software R&D tax relief?
There are some general rumours around R&D tax relief and how it’s not worth the fuss because so many costs don’t apply. Many of these are simply untrue. For example, you can claim for subcontractor costs for the portion of time they spend working on your R&D project. As mentioned above, even if your project completely fails to meet its aim, you can still make a claim.
Of course, not every single cost connected to your software R&D project can be included in your claim. Let’s get the bad news over with. Here are some examples of costs that are not eligible for inclusion on your software R&D tax relief claim:
- Market research
- Legal fees
- Everyday projects that do not require innovative answers to a technical problem
- Beta testing
- Advertising and marketing
Do all aspects of software development count in an R&D tax relief claim?
Yes, all aspects of the software development industry count towards your R&D claim. The diversity within the software development category is continuously increasing. There are now many different branches, some with specific offshoots, that HMRC would consider part of software development. This is one of the main reasons for the upgraded guidance. All of these speciality areas within software development are eligible to claim R&D tax relief, as long as you meet the criteria of the tax relief scheme appropriate for your company.
Some areas of software development that are eligible for R&D tax relief
Cloud computing software is being trialled across many sectors, like the much advertised accountancy apps, with a lot of success. You claim can include: brand new cloud tools, integration of cloud systems, enhancing existing cloud technology.
The UK Video Games Industry is so successful that the government have instituted an extra Video Games Tax Relief that can be claimed in addition to R&D tax credits. It is wise to seek professional advice to make sure that the balance of your claims maximises your overall potential tax relief. But you can apply for both, for the same R&D project, because they cover different aspects. Our favourite example of this technology is a project using motion capture technology with rescue dogs in order to improve on screen representation of animal movement.
We have so much more digital data to store and organise. Software that improves the efficiency of both elements is essential. Developing tools that enable the effective organisation and retrieval of information are now crucial to most systems. There is no point storing data that you cannot access. The refinement involved in taking a question from a human and creating a database that is able to find an accurate answer is amazing software innovation.
Virtual reality ‘real world experiences’ are fast becoming a common entertainment choice. The software required to make a simulated experience feel ‘real’ is astonishingly sophisticated. From the novelty of potential holograms to a training tool for our emergency services, this type of software has many applications.
Artificial Intelligence (AI) is a category which has grown so big it needs its own sub divisions. Machine learning is a game-changer in terms of what we can expect software systems to accomplish. With a basis of statistical probability analysis, computers can ‘learn’ to make decisions based on their existing data. Digitisation of pretty much everything means that AI’s potential is being explored and used across all other industries. Meaning that it is now a major factor in the software development industry.
How AI software is already being used:
- Hypergraph creation: Supporting police to process high levels of data with unprecedented speed
- Wearable tech: Measuring levels of inebriation
- Imagery analysis AI combined with drone technology: Keeping swimmers safe with accurate shark spotting drones
- Video Assistant Referee: Improving the accuracy of football refereeing
- Facial recognition technology: helping to police high crowd density situations
- Advance machine learning: Development of driverless cars
Obviously, many of these categories overlap and are used together in particular projects. It is fascinating to see how quickly new areas of software development evolve and become part of our everyday language. If you work in any area of software development, make sure you don’t miss out on the substantial R&D tax relief you are entitled to.