The software industry is almost synonymous with innovation. It is a rapidly evolving space, where innovation comes thick and fast in response to shifting challenges.
But did you know, according to HMRC (Autumn 2020), the Information and Communications sector of the UK economy receives the third highest amount of R&D tax relief, while submitting the second highest number of claims?
‘Software’ is extremely broad, insofar as an industry descriptor goes, so you may be wondering if your own software innovation counts as R&D for government-backed tax relief purposes.
What is R&D Tax Relief?
In case you aren’t familiar, R&D Tax Reliefs are government-backed tax incentives designed to encourage innovation through R&D. For SMEs, these generous incentives are worth around 25% of what you have spent on R&D. In order to qualify, however, the expenditure must meet HMRC’s definition of R&D.
What kind of software innovation counts as R&D?
There are some clear distinctions that you should be aware of when assessing your software project’s eligibility for R&D tax relief.
- The innovation must take place within a computer software project.
- It must seek an advance in computer science or IT, or an advance in overall knowledge or capability in computer science or IT.
- It can’t just advance your own company’s knowledge and systems – it must be an overall advance in software technology.
- The objective of your innovation must not simply be copying or adapting an existing software process or product.
Seeking advances in the software technology layer
Another important consideration is where the innovation takes place within an overall project. For software innovation to qualify for R&D tax reliefs, the advance must be made in the technology layer, not through its application.
So, what does this mean exactly?
A piece of technology will usually have an existing baseline; this is the starting point of an advance in said technology. The advance will seek to extend this baseline beyond currently known capabilities.
In other words, we believe the majority of qualifying software project work takes place in the back-end systems, rather than front-end (what the user sees).
Examples of software projects that qualify as R&D
The easiest way to understand what software projects qualify as R&D for the purposes of tax relief is to see real examples.
The Radius R&D Tax Relief Case Study Guide contains 26 detailed examples, including what the companies do, what the project included, and how much Corporation Tax they were able to save through the reliefs.
The example software projects include the following activities:
- Defining technical objectives, or technical requirement analysis
- Technical feasibility studies and technical planning for the R&D elements of the project.
- Analysing, designing, developing, and building the technology.
- Producing technical specification or other documents to explain and support the R&D project and advance.
- Testing the product, process, or software (excluding functional testing).
How to check your eligibility
The Radius team would love to help maximise your R&D tax relief claim for software innovation. The first step is to find out if your work qualifies.
Our team welcome you to book a free 30-minute consultation to discuss your business, activities, and eligibility. Alternatively, you can download our free Eligibility Checklist, which takes just 10-minutes to complete.
Darryl Hoy
Darryl is the Technical Director of the Radius team. He is a specialist in Research & Development tax reliefs, having previously worked at HMRC as an R&D Tax Inspector.
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