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Software development is essential for driving some of the UK’s most exciting industries, such as cybersecurity, fintech, robotics, artificial intelligence, medical technology, telecommunications, and quantum computing.
It also plays a huge role in supporting innovation across a wide range of industries, often supporting advanced R&D projects with new ways to capture and analyse data to unlock breakthroughs. The UK government even goes as far as saying: “Software is the lifeblood of the digital economy. It underpins all of the digital services we rely on, driving productivity and growth across the UK.”
To help drive this productivity and growth, HMRC incentivises research and development software development projects by allowing cutting edge businesses to claim R&D Tax Credits on qualifying expenditure.
In this article, we explain the ins and outs of how to claim R&D relief for software development projects.
Yes! There are two ways in which software development might qualify for R&D Tax Credits:
For a software development project to be eligible, it needs to be classed as having qualifying R&D activity (as with any other R&D project).
This means that your software development project must:
There are a variety of different costs that can be claimed for, including consumables, staff costs, externally provided staff, subcontractors, software licences, data licences and cloud computer storage. You can find out more by reading our article: What qualifies as R&D expenditure for claiming tax relief?
Only the activities that directly or indirectly contribute to R&D are eligible for relief. For example:
Work that isn’t likely to be eligible includes:
Work that indirectly contributes to part of the R&D project, such as training, admin costs or maintaining computers, can also be claimed.
You must apportion costs based on how much something is used for an R&D project. For example, if an IT technician spent 50% of their time on a software development project, you can claim 50% of their salary. Similarly, if you used 25% of your cloud computing storage space for a particular development project, you could claim 25% of the costs.
Below, we list potential examples of qualifying projects that might be eligible for claiming R&D Tax Credits.
HMRC’s software case studies give a detailed breakdown of fictional examples, including what work would and would not be considered qualifying Q&D activity within the projects.
You can also find out more able examples of qualifying software projects by reading our case studies:
No. It’s absolutely fine for R&D tax purposes if the software that you’ve developed is used in-house for your company only or if you licence or sell it for commercial use.
While computer/video games can be ground-breaking and innovative, including the animation and programming, they are not always classed as R&D for tax purposes.
Developing innovative new code may be eligible, but advances in computer graphics or telling exciting stories won’t qualify.
There is, however, a separate Creative Industries Tax Relief for if your video game has been certified by the British Film Institute (BFI) and will be on commercial sales to the general public. You will only be able to claim for either a Creative Industry Tax Relief or for R&D Tax Credits – not both.
One of the main areas of confusion for businesses is that because software use by its very nature can be cutting-edge, so trying to identify what is an ‘advance’ or what is a ‘technological uncertainty’ might not always be straightforward. What was ground-breaking just two years ago may not be eligible today. That’s where we can help.
Not only are we constantly up to date with the latest innovations and industry advancements, but our consultants are experts in their field and understand the intricate details of software applications when it comes to R&D. As such, they’ll be able to determine what counts as qualifying expenditure when claiming R&D Tax Credits for software projects.
Over 60% of software businesses are eligible for R&D Tax Credits, so it’s well worth getting in touch to see how you could benefit.
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