Determining which aspects of software development qualify for R&D tax relief is challenging. The key question is: Which software development activities are eligible under the specific R&D legislation? Misunderstanding what qualifies as “eligible R&D activities” can lead to costly mistakes, with some companies underclaiming and others overclaiming tax relief.
There are common misconceptions. Some companies assume that all software development qualifies as R&D, while others believe that software development is not eligible because it does not involve traditional “white coat” laboratory research. Both assumptions are incorrect. Eligibility is not based on whether the work is scientific in the conventional sense but on whether the software project meets HMRC’s criteria for advancing technology and resolving technical uncertainties.
Having successfully prepared numerous software development R&D tax claims for clients ranging from FTSE 250 companies with turnovers exceeding £3.7 billion to start-up companies with minimal revenue, we know that a solid understanding of both R&D legislation and the specifics of software development is essential for making a successful claim.
In some cases, the companies we work with are not primarily software businesses. However, they undertake software development projects to create new or improved data architectures that go beyond standard, off-the-shelf solutions.
When assessing whether a project qualifies for R&D tax relief, three main factors should be considered:
By focusing on these core criteria, companies can better assess whether their software development projects qualify for R&D tax relief.
For a project to qualify for R&D tax relief, it must aim to achieve an advance in overall scientific or technological knowledge, not just an improvement in the company’s internal capabilities. This advance could involve creating new functionality or making a significant improvement to existing software, as long as it is not a trivial or routine change.
To establish whether a project represents a genuine advance, it is essential to consider the technological context at the time. First, identify the baseline technology—that is, the existing technology in use when the project began. The advance should be measured against this baseline, focusing on the technological state of the industry, not just the company’s own starting point.
A qualifying advance often involves addressing a gap in technological knowledge or capability that made the project necessary. For example, the integration of platforms in a way that cannot be achieved through standard methods may qualify as R&D. However, routine modifications or adaptations of existing software are unlikely to meet this standard, as they do not push technological boundaries.
Finally, examine the technological changes made during the project to achieve or attempt this advancement. An appreciable improvement to an existing process, material, device, product, or service—especially one that allows it to be used in a new or significantly improved way—may qualify as R&D. The project should demonstrate a meaningful enhancement, not just minor adjustments or improvements to functionality that already exists.
For a software development project to qualify for R&D tax relief, it must involve genuine scientific or technological uncertainties. This means there must be challenges that cannot be easily resolved by a competent professional in the field, with no straightforward solution available based on existing knowledge. Unlike routine software development, qualifying R&D focuses on technological questions, not commercial outcomes.
To establish that a project involves technological uncertainty, it is essential to accurately identify the challenges faced. These challenges should be specific technical issues that make it uncertain whether the intended functionality can be achieved. In other words, there should be doubts about whether the software could perform as required due to limitations in current technology or gaps in existing computer science knowledge.
For example, a project might involve an ambitious goal—such as creating a new algorithm or data processing method—that is uncertain because existing approaches are inadequate or inefficient. The uncertainty should arise from the technology itself, not from practical considerations like time or cost. Only uncertainties that require experimentation, investigation, or innovation to resolve will typically qualify as R&D.
To qualify for R&D tax relief, it is essential to understand when a project’s R&D activities begin and end. According to HMRC guidelines, R&D begins when work to resolve a scientific or technological uncertainty starts. R&D ends when the uncertainty is resolved, or when work to address it is discontinued. Only activities conducted within these boundaries are eligible for R&D tax relief.
Understanding project boundaries helps ensure that only the genuinely innovative and uncertain aspects of a software project are included in an R&D tax relief claim. Activities beyond these boundaries should be excluded to ensure compliance with HMRC guidelines.
Some activities do not qualify, including:
