R&D tax relief on software testing

30th Aug 2019
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If one of your clients works in the field of software testing, it’s important that they understand the intricacies of claiming R&D tax relief. And this is where you – and we – can help them.

Innovative activities revolving around research and development take place when a particular technological or scientific advancement needs to be made. Such work is very prominent in certain industries and information technology is certainly one of them.

Here we look at the relationship that software testing specifically has with research and development (R&D) and how R&D Tax Credits can be claimed on it.

Why are R&D Tax Credits worth claiming?

If a company carries out any research and development work then it may be eligible for R&D Tax Credits to help with the cost. They’re a UK government-backed tax incentive designed to encourage innovation, either by offering companies a reduction in their Corporation Tax bill or as a cash lump sum credit. Here's 5 surprising statistics you may not know about R&D tax credits

So can a company claim for pretty much anything?

No - not quite. Research and development can mean various things to different companies, and the term can be applied in several different contexts. R&D may involve commercial research, organisational research, technical research, productivity research and so on. However, as far as R&D Tax Credits are concerned, the research and development that companies can claim for must be technical or scientific development only.

What R&D projects will qualify?

As mentioned, an eligible R&D claim is dependent on whether or not a company is looking to make some sort of technological or scientific advancement. This could involve technologically innovative work in designing a new product, process or service, or it could improve one that already exists. All advances should involve technological or scientific change, however, the project itself doesn’t actually have to be successful; software testing R&D which has failed in some way can still be eligible for the relief.

As well as an advancement being present, there must also be some technical or scientific uncertainty as to whether the product is actually feasible, and how results can be achieved in practice. Where these uncertainties require trialling, research and testing then R&D Tax Credits will very likely apply.

The R&D project in question must also not be deducible by a competent professional that works in the field already. In other words, if another professional who is fully trained and competent in software testing could quickly and easily work out a solution to a specific problem, then it would not be classed as eligible R&D for tax relief purposes.

Finally, there must be a specific software testing project involving a deliberate plan or method that is believed to achieve the advance. So a company must be working to resolve a clearly defined scientific or technological uncertainty, rather than just randomly trying things and hoping for the best.

Can R&D Tax Credits be claimed on software testing that’s part of a bigger R&D project?

If a company is claiming R&D Tax Credits on a particular piece of software testing work, then the project itself is likely to be complex with a considerable amount of software testing. Technically speaking, R&D projects run from the initial concept and planning stage right through until all of the uncertainties have been resolved, i.e. a company is happy that the software is fully operational and is ready to market commercially. In reality, for the majority of cases, pre-launch software testing will come under a larger R&D project because all of its technological uncertainties remain unsolved until the full project is complete. Whether a company carries out the software testing on site or contracts it out to a third party (in which case it’s likely to be considered as subcontracted R&D), then the software testing costs should be eligible for R&D Tax Credits.

Is all software testing claimable under the R&D Tax Credits scheme?

Much of it is, but sadly not all. A number of companies operate (or contract out) a process whereby software is tested continuously, in order to make sure it carries on working as expected. This applies particularly for software that needs regular updates, or where the subject is constantly affected by external factors (such as browser updates and other factors that are outside of the software company’s control). Carrying out “health check” style testing every so often in light of these updates would not be eligible either unless it came under a broader R&D project.

Can software testing be an R&D project in its own right?

One of the big things in the software world is automation. In years gone by, most software testing would generally have been completed manually, with software developers testing the software repeatedly using slightly different inputs each time. This allowed them to thoroughly test all the different usage combinations. For example, with an online shop, testers had to fill in web forms with different pieces of data in order to discover any problems or errors. Nowadays this is a very old-fashioned way of working, and time consuming too. Software testing companies have moved things on by developing automation suites which can bombard software systems with inputs and data much more quickly than humans can, and with less room for mistakes. This could be a bespoke system for a particular client, or a general system. With regard to an R&D Tax Claim, it’s very likely that the development of such software tools and automation systems would be applicable, as long as they go beyond what a competent professional could reasonably achieve themselves.

How much R&D Tax Credit might your client be able to claim?

Tax Cloud UK, in conjunction with Myriad Associates, has developed a handy online platform to help you help your clients. With a specific section aimed at accountants, it allows you to offer your clients a bespoke R&D Tax Credit service.

Our specialism is R&D tax - and we know it inside out. If you would like to discuss any issues around R&D reliefs or ask us a question, please do get in touch using our contact form. Alternatively, you can call our friendly expert team on 0207 118 6045