What Should A Software Company Consider When Making An R&D Tax Relief Claim?

3rd Jan 2020
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Your client doesn’t actually need to have a physical software company in order to receive R&D Tax Credits for software development. All businesses, regardless of type, can make a claim as long as they are developing some kind of software.

The same rules regarding R&D tax relief apply across all sectors and industries for this very reason. So if your client’s company develops software specifically to help with its R&D project, then eligibility for the relief is likely.

What are the criteria?

The eligibility criteria for R&D Tax Credit claims regarding software development are identical to any other industry.

Generally speaking, to be eligible your client must:

  • Be inventing a brand new software product or updating/improving an existing one.
  • Looking to overcome a specific technological or uncertainty as described by HMRC. This is a deliberately broad umbrella, but with regard to software development, they must be creating a new pathway in reaching their goal. In other words, the knowledge must not already be readily available.
  • Be able to explain how the specific technological/scientific problem will be solved by their software development - or the intended resolution at least. A particularly attractive thing about R&D Tax Credit is that the R&D project concerned doesn’t have to ultimately be successful.
  • Be gaining new knowledge in their field. This knowledge must be generally relevant and not just specific to their business.

What costs don’t qualify for software-related R&D tax relief?

We’ve found some people wrongly believe that a large number of costs aren’t applicable in an R&D Tax Credit claim, but this simply isn’t true. For instance, your client is allowed to claim for subcontractor costs pertaining to the R&D work specifically, as well as other things like fuel, electricity and gas. As we’ve already mentioned, this is still the case even if the project failed for some reason.

Of course, although a large number of costs connected to your client’s software R&D work will be eligible for R&D tax relief, some will not. Examples of ineligible costs include:

  • Legal fees
  • Market research
  • Advertising and marketing
  • Beta testing
  • Everyday work activities that do not involve any innovation

Do all aspects of software development count in a claim for R&D Tax Credits?

Yes, all aspects of the software development industry will count towards your client’s claim for R&D tax relief. HMRC recognises the diverse and ever-changing nature of the software development industry and its off-shoots. Its guidance around claiming therefore reflects this. The main point is, your client must meet the criteria that HMRC sets out for claiming R&D tax relief as appropriate for their company.

What different areas of software development would be eligible for R&D tax relief?

This would be things like:

Data

These days there is so much more digital data around that companies need to organise and store. Software can massively improve the efficiency of both elements and is a vital component of modern business practice. Tools that help with the effective retrieval of information are also now essential to most systems - after all, there’s no point in having a load of data you can’t access.

Video Games

The UK Video Games Industry is now so successful that the government offers an additional Video Games Tax Relief that can be claimed as well as R&D Tax Credits. This where we come in, as we can work with you to advise on how your client can gain the maximum advantage from both reliefs.

The reason that software companies can apply for both is because each relief covers different aspects.

Cloud software

A relatively new concept, Cloud computing software has now been trialled across many industries with great success. Your client’s claim could include: integrating cloud systems, designing brand new cloud tools or improving cloud technology that already exists.

AI

Artificial Intelligence (AI) is now a category that has grown so much in recent years it’s developed its own sub-divisions. Machine learning particularly has had a massive effect on what software systems are now able to accomplish. Using highly accurate statistical probability, computers are able to ‘learn’ to make decisions based on data they already have. Such digitisation of just about everything means that the potential capabilities of AI are being explored and utilised across many other sectors. Essentially, AI is very much here to stay.

How is AI software already being used?

There are many ways AI software is being used already, including:

Wearable tech: For example wrist watches that measure a person’s health, fitness and activity levels.

Facial recognition technology: Helping the police pick out individual faces in a crowd.

Drone technology and imagery analysis: Helping to spot sharks for example to keep swimmers safe. Also used in agriculture to manage crop disease.

Hypergraph creation: Helping the police to process huge amounts of data incredibly quickly.

Advance machine learning: Developing driverless cars

Video Assistant Referee: Boosting the accuracy of refereeing in sports like football and cricket.

Clearly a lot of these categories overlap, and it’s fascinating to consider just how fast new areas of software development evolve. If one of your clients work in any area of software development, make sure they don’t miss out on the R&D tax relief they’re eligible for - they may well end up thousands of pounds better off.

How can Tax Cloud UK help?

We know that both you and your clients are busy getting on with your day jobs. Working through R&D Tax Credit applications can be time consuming, not to mention fiddly.

So here at Myriad Associates we’ve developed the Tax Cloud portal for accountants. Simply enter your client’s financial details to see exactly what they could receive. The portal will also guide you through the process of claiming, and of course we’re on hand to support you too.

For further advice on R&D Tax Credit claims, call our specialist team on 0207 118 6045 or contact us and let us take the hassle out of R&D tax relief.