We know that HMRC have been targeting software development claims for some time now.
The BEIS (Business, Energy and Industrial Strategy) guidelines that define the qualifying criteria for R&D tax relief, apply equally to all fields of science and technology. However, there’s been some difficulty in applying these to software projects in particular.
HMRC has invested time and resources in educating their inspectors. They’ve also brought in software specialists to help identify non-qualifying activities and projects.
So how do you know if your software project qualifies? Here’s our summary of the key points to consider:
Have you advanced the technological knowledge or capability across the entire field?
The advance’ or ‘appreciable improvement’ that you’re seeking to achieve needs to ‘advance the knowledge or capability’ across the whole field of computer sciences and information technology, rather than the company’s own knowledge or capability.
Whether ‘the advance’ applies to the entire industry can sometimes be hard to work out. What you need to consider is what information is publicly available and whether this be resolved by ‘a competent professional working in the field’.
Focus on the underlying technology
The ‘technological advance’ that you’re seeking to achieve should focus on the underlying technology being developed i.e. the algorithms and methodology, rather than the commercial output of the software.
This is because software can be developed to provide functionality that is novel, but the methodology applied to achieve that can be routine – which means it won’t qualify.
How to identify ‘technological uncertainties’
As with all other industries, a company claiming R&D tax relief must also face ‘technological uncertainties’ in their attempt to achieve an ‘advance’.
‘Technological uncertainties’ arise when a ‘competent professional in the field’ is not readily able to work out a problem, or you can’t resolve it by applying existing methodology.
Some examples of ‘technological uncertainties’ include:
- Developing new or improved data architectures that cannot be achieved with existing solutions, e.g. pushing beyond the boundaries of existing, readily available database engines.
- Extending software frameworks beyond their original design, where knowledge on how to extend these was not available, or readily deducible at the time.
- System uncertainty when working with multiple components, as a result of the complexity of the entire system, rather than how the individual components behave i.e. components cannot be assembled into an established pattern.
Separate the R&D project from the commercial project
R&D projects must be carefully defined within larger commercial projects. Any activities that do not attempt to overcome ‘technological uncertainties’ do not qualify for relief. Examples of activities that don’t qualify include:
- Planning activities associated with non-R&D elements of the project, such as financial, marketing, and legal aspects.
- Development of routine aspects of the software, such as the user interface, rather than the underlying technology.
- Testing that validates that the software works properly once the technological uncertainties have been resolved.
- Deployment or release activities that transfer software to production systems after the uncertainty is resolved.
- Maintenance activities or minor fault fixing that don’t involve technological uncertainties.
If you would like further advice regarding the availability of Research & Development Tax Relief, please get in touch with us.