Software

The list of software projects that usually qualify for R&D tax relief is broad. Some common examples of the types of software development projects that usually qualify for R&D tax relief include: 

• Software for new projects, or new functionality for existing R&D projects 
• Tools to extend the functionality of application software programs or of an operating system 
• Making extensions to database software, programming languages, or operating systems Software development tools, such as tools to port data across platforms, tools for image processing or character recognition 
• Novel data management techniques, such as new object representations and new data structures 

• Innovative methods of capturing, transmitting, manipulating, 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  
• Means of integrating hardware and software platforms 

The following tasks are usually considered eligible for software R&D tax credits:  

• Defining technical objectives 
• Identifying uncertainties 
• Feasibility studies 

• Reviewing new and competing technologies  
• Analysing, designing and developing the technology  
• Producing technical specification or other documents to explain and support the R&D project and advancement  
• Testing the product, process or software  
• Planning and managing projects 

• Indirect activities that are specifically required to support R&D activities may also qualify for R&D tax relief (e.g. administration, finance, personnel and training). 

When submitting an R&D tax relief claim for your software project, you can normally claim for the following expenses:     

• Staff costs (Staff costs include gross pay, employer's NI and employer's pension contributions)  
• Agency workers, subcontractors or freelancers 

• Software licenses  
• Disposable items such as heat and light, and materials and equipment used in, or transformed by, the R&D process 
• Cloud computing and data storage and handling from April 2023.

There are two R&D Schemes you can apply for R&D tax credits under.   

1. SME scheme 

This scheme is used by companies that have:  

• Less than 500 members of staff 
• Have a turnover of under €100m 
• Have a balance sheet that’s under €86m 

The SME scheme allows profitable organisations, that meet the above criteria, to deduct an extra 130% of their eligible R&D expenditure from their taxable profit. For businesses that have made a loss, a claim can be made that’s worth up to 14.5% of the surrenderable loss.  

2. The RDEC Scheme 

The RDEC scheme is usually used by larger companies (or by SMEs who have either received some kind of grant for the R&D work or where it has been subcontracted to them by a non-SME) that have:   

• A staff headcount of over 500 
• A turnover of €100m or more 
• At least €86m in gross assets 

With the RDEC scheme, companies can expect a claim value of up to 9.72% of their eligible expenditure. 

Having a clear understanding of the R&D legislation surrounding software development is key to making a successful R&D claim.  

To qualify for R&D tax credits, your company must pay UK corporation tax and it should be funding the software development project you’re putting a claim in for.  

Work out which activities should be included in your R&D tax claim and attribute the correct amount of time and expense to each one. Then, choose which scheme you want to apply under: the SME scheme or the RDEC scheme (see above). 

When determining if your company qualifies for a software R&D tax credit claim, just consider what advance your software project is making and what the technological uncertainties surrounding the project are.  

To avoid triggering an HMRC investigation check to make sure that your software project is eligible to receive R&D funding (see above).  

To make it easier to compile your R&D claim, add R&D tags into your source code and add detailed notes about specific R&D tasks and experimentations that have been done.  

To make sure your R&D claim is accepted by HMRC, write a solid technical narrative:  

• Write from a technical perspective 

• Keep it simple 
• Avoid jargon  
• Don’t be afraid to include details about field projects as it shows HMRC that your software project is hard to solve 

The process of claiming for software R&D tax credits can be complicated and difficult. So, contact the R&D tax credits team for help with maximising your R&D tax claim.

Your software development project doesn’t have to be pioneering or even successful to qualify for R&D tax relief. But it does need to meet two criteria:  

1. Does your project seek to create an advance in science or technology?  

To meet this criterion, you must prove you’re doing at least one of the following: 

• Looking to achieve something that hasn’t been done before 
• Trying to overcome constraints that haven’t been faced before  
• Using methods that haven’t been tried before 

2. Is your project overcoming a scientific or technological uncertainty? 

When submitting an R&D claim for your software project, you need to prove to HMRC that the objective of your project is to overcome uncertainty at a technology level, and you need to show evidence that the uncertainty was not immediately resolvable. 

You can claim R&D tax relief for costs associated with your software project. These might include staff or subcontractor costs or even disposable items such as heat, light and power.  

An eligible software development project can be anything from integrating hardware and software platforms to building a tool for image processing.  

The types of activities you can claim R&D tax credits for range from conducting feasibility studies to testing products. 

To be eligible as qualifying R&D expenditure, expenditure must be allowable as a deduction in calculating the taxable profits of the company.

Capital expenditure is therefore excluded but could qualify for R&D Capital Allowances. However, if the expenditure is recognised as an intangible asset in the accounts relating to R&D revenue expenditure it will still be eligible for R&D tax relief.