Can software developers claim R&D Tax Credits?

All companies should consider claiming R&D Tax Credits if their research and development has used a systematic approach to resolve a scientific or technological uncertainty.

What many businesses don’t realise is that, in certain circumstances, this definition of R&D can be applied to innovative software development projects. It’s an important industry for Ireland’s economic growth, with market revenue from software development projected to reach $1.49 billion (€1.36 billion) this year. The expansion of artificial intelligence and the demand for ever-more-secure cybersecurity are helping to drive innovation faster than ever before.

However, there is a lot of confusion around what qualifies. While much of the work is routine, software development can also deliver exciting technological breakthroughs. When advances do occur, businesses should look to claim valuable financial support, which is calculated at 25% of qualifying R&D expenditure (rising to 30% for accounting periods starting on or after 1 January 2024).

In this article, we highlight the software development activities that qualify for R&D Tax Credits and answers questions to help businesses prepare for a successful claim.

What software development activities qualify for R&D Tax Credits?

Qualifying advances tend to happen when there is an innovation in:

Algorithms: E.g., developing a new machine learning algorithm that significantly enhances the accuracy of predictive analytics in healthcare data.
Techniques: E.g., developing a new image compression technique that maintains higher quality at lower file sizes.
Constructs: E.g., implementing a new data structure that optimizes storage and retrieval operations for large-scale databases.
Software architectures: E.g., developing a microservices architecture that allows for better scalability and maintenance of a complex e-commerce platform

To know if your work qualifies, you’ll be able to demonstrate that you’ve overcome an uncertainty, which might relate to:

functionality
turning theoretical models/algorithms into code
scalability
platform compatibility
application/system integration.

Any qualifying activity must be approached systematically, meaning you can’t accidentally stumble across a technological advancement – you must have followed an iterative process towards a clear goal. This is likely to be straightforward if you’ve followed a standard software development life cycle, as these tend to follow structured processes that will include trial and error.

You also must be able to pinpoint the exact phases (e.g., design, build, or test) where innovation and technological advancement has been achieved. For example, if a company develops a new algorithm during the design phase to solve a technical challenge, that specific activity would likely qualify. However, routine coding tasks in the build phase might not qualify unless they involve overcoming significant technical hurdles.

Can agile software development projects count as R&D?

As long as your innovation resolves a scientific or technological uncertainty, it’s perfectly acceptable to have followed agile development methodologies such as Scrum. While the methodologies are more flexible, they’re still goal-oriented, and they also allow for iterative progress, which fulfils the necessary criteria of taking a systematic approach.

It is important, however, to make sure that any work conducted as part of an agile project is clearly documented as there are likely to be both qualifying and non-qualifying activities undertaken during sprints. In these circumstances, costs, such as staffing costs, must be apportioned between qualifying and non-qualifying tasks.

What software development activities do not qualify for R&D Tax Credits?

Generally, any activities that are routine, market-driven, or don’t address technical uncertainties are not eligible for R&D Tax Credits.

This means that a lot of software development activities wouldn’t be eligible, including:

maintenance
routine tasks like copying, upgrading, or adapting an existing product, process or service
using existing methodologies in standard dev environments
using existing methodologies in standard dev environments
relying on normal features and functions of off-the-shelf tools
user acceptance testing that focuses on accuracy and completeness
dev work aimed at packaging a product for market
adding features where there is no scientific or technological advance.

How can my software development company prepare for claiming R&D Tax Credits?

The best way to prepare for any R&D claim, software development project or otherwise, is to have clear records of the work that you’ve undertaken, with an activity breakdown including any associated expenditure.

This is probably simpler for larger projects, as they tend to have formal governance supporting them, making it easier to track qualifying expenditures, but it’s important to get into the habit of documenting work that occurs within smaller projects and agile projects.

This makes identifying qualifying costs much easier and allows you to evidence your claims with confidence.

How can Leyton help?

The rapid pace of innovation and change in software development can make it hard for businesses to know if their work qualifies as a genuine technological advance. That’s where we can help.

We have a team of software sector specialists who are up to date with the latest industry advancements. Their expertise means they can identify qualifying expenditures, allowing you to maximise your R&D Tax Credits claim.

Speak to a member of our team to find out more.

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