Research & Development Tax Credits for Software Development

Most SME's understand the benefits that new software can bring to their business but, for some, the costs can be off-putting.

In this article we team up with Chartered Accountants Crowthers and bluebox client Home Leisure Direct to highlight how small businesses can benefit from a government scheme – one that annually helps over 7,500 SME’s secure an average of £55K towards the cost of their new software projects.

The Basics

Research and development (R&D) tax relief is a government subsidy administered through the Corporation Tax Self-Assessment system. The relief rewards companies that carry out innovative activities, to technically improve products, processes, devices, materials and/or services.

For companies that are making profits, the relief can reduce their Corporation Tax bill and represents a subsidy of approximately 25p per £1 spent on R&D.

For some small or medium-sized companies that make losses, the relief allows them to cash in their losses for a cash sum, representing a subsidy of as much as 32p per £1 spent on R&D.

Who can claim?

As the name suggests, the Scheme is designed to assist companies doing a whole host of R&D activities, not just software.

At its broadest, the scheme defines qualifying R&D as activity that is looking into new processes and is attempting to resolve scientific or technological challenges.

This could include:

• Creating new products, processes or services; or
• Changing, modifying or improving an existing product, process or service in some way.

There is a common misconception that the relief only applies to high-technology companies, but, in fact, the relief is equally applicable to companies that operate in engineering, manufacturing, software and agricultural industries.

In short, you don’t need to have software development at the core of your business. The Scheme is equally applicable if you have invested in software to improve a service or process.

What software projects qualify?

Up until recently, official guidance on what software qualifies under the scheme lacked sophistication. It only offered examples of software that sat at polar opposite ends of the spectrum - ones that obviously fell outside (e.g. using off-the-shelf software to build a new website) and ones that were inside (e.g. developing a new semantic language).

This left no steer for the vast majority of software projects that sit somewhere between these two extremes.

The new guidance, which was put together in conjunction with specialists in the field, is much more nuanced. It covers common scenarios in software development and sets out three key concepts that need to be considered when identifying a R&D project;

• The advance
• The technical uncertainly
• The boundaries of R&D

Usefully, the guidance includes some questions that you should ask when assessing whether a software development qualifies as R&D. Examples include;

• What is the baseline in technology that any advance sought is being measured against?
• What technological changes have been made in seeking a technological advance, or attempted advance?
• What was it about the technology/computer science that made it uncertain whether software could be made to do what the company wanted it to do?

The new guidance also makes it clear that most off-the-shelf software projects are unlikely to qualify;

“It is unlikely that customisation such as configuring existing software to a company’s own requirements would be qualifying R&D because it is generally already within the capability of the existing software.”

However, it is worth stressing that the software being developed does not need to be unique.

Although the guidance for software is now much better, there are certainly still grey areas. So how should you go about claiming?

How you can claim R&D tax relief?

Most companies making an application under the scheme choose to do so via an accountant or financial advisor. Some accountants, like  Crowthers, offer the service with no-upfront fee. Instead they operate on a success-only basis.

And that’s the route that long-time client Home Leisure Direct chose to go down when they successfully applied to the Scheme - see ‘Success Story’ box below.