R&D Tax Relief in Software
HMRC note, in their R&D tax credits statistics, that around 20,000 claims were submitted and circa £1.7billion in tax relief had been claimed through R&D tax relief in the field of IT in the 2022 tax year. The second largest category of claims sits in manufacturing, which undoubtedly, due to advances in automation, robotics, and logistics, would include a huge element of Software. One thing is for sure, Software or Computer Science, as a field of Science or Technology, may be one of, if not the largest area of R&D tax relief claims that HMRC see. With the prevalence of artificial intelligence as well as the rapid advent and sophistication of Software technology, it's likely that claims in this sector have significantly increased to present day and will continue to do so exponentially.
Software development is a continuously evolving field, where innovation and pushing technological boundaries are essential for success. From creating cutting-edge applications that transform industries to optimising existing systems for improved performance and user experience, software companies are at the forefront of driving digital advancements. Amidst this landscape of rapid change and problem-solving, many businesses may be overlooking a significant opportunity – the potential to claim R&D tax relief for their software development efforts.
If your company’s software development efforts involve resolving technological uncertainties or overcoming complex challenges, it’s possible that your business may qualify for valuable R&D tax relief incentives.
What areas of Software are claimable for R&D tax credits?
Software development is a fertile ground for R&D activities, and many areas could potentially qualify for R&D tax credits. Here are just a few examples of potential areas:
· Artificial Intelligence(AI) and Machine Learning (ML): Developing AI algorithms, training data models, or integrating AI/ML capabilities into software solutions.
· Cybersecurity: Implementing advanced security measures, developing encryption techniques, or creating secure software architectures.
· Cloud Computing: Developing cloud-native applications, optimising cloud infrastructure, or addressing cloud scalability and performance challenges.
· Internet of Things(IoT): Integrating IoT devices, developing IoT software platforms, or addressing IoT data management and connectivity issues.
· Virtual and Augmented Reality: Developing immersive VR/AR experiences, creating 3D rendering algorithms, or addressing challenges in user interaction and performance optimisation.
· Big Data and Analytics: Developing data processing pipelines, implementing advanced analytics algorithms, or optimizing data storage and retrieval systems.
· Mobile App Development: Addressing challenges in mobile app performance, battery optimization, or integrating new hardware capabilities.
· Gaming: Developing advanced graphics engines, implementing physics simulations, or optimising game performance across various platforms.
What costs are claimable within R&D tax relief?
When it comes to an R&D project, there is a wide range of expenditures that can be claimed for tax relief purposes. These eligible costs span from direct staff costs to externally provided workers, as well as expenses related to licenses, consumables, and more. The core areas of costs that qualify for R&D tax credits include:
· Salaries and wages for employees directly involved in R&D activities.
· Costs associated with hiring external R&D staff or consultants.
· Consumable items used in the R&D process, such as fuel and power.
· Prototypes developed specifically for testing and evaluating the R&D work undertaken.
· Subcontracting R&D work to third-party organisations
· Expenses related to data and cloud computing services (accounting periods beginning on or after 01/04/2023).
· Advancements in pure mathematics (for accounting periods beginning on or after April 1, 2023) –mathematical breakthroughs themselves are treated as scientific endeavours for the purposes of R&D tax credits.
It is worth noting that costs will be claimable if they are deductible in computing your corporation tax, such as revenue expenditure in the profit and loss account. This also includes costs capitalised as intangible assets if the company elects to make a full revenue deduction of the costs under CTA09/S1308, treating them as revenue for tax purposes.
How can an R&D tax consultancy expert help you claim in the field of Software?
Since the release of additional guidance by HMRC in its CIRD manual on qualifying claims in the field of Software, we are aware that HMRC are looking for companies to clearly define the boundaries of the qualifying activity for tax purposes in their Software R&D claims. This is to say that there may be elements of your commercial IT project that will not qualify for R&D tax credits, while they still may be seen as fitting the definition of commercial R&D, or even the accounting definition of R&D. RCK partners has a team of experts from full stack software developers to system engineers, with expertise in R&D tax credits who are best placed to identify which activities would be claimable and to assist you in compiling a report that fits HMRC’s stringent DSIT (Department of Science, Innovation and Technology) guidance. Please reach out to book a no-obligation discovery call with one of in-house experts.
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