Defining software development is one of the most challenging areas for R&D advisors and HMRC alike. The question that needs to be addressed is: “What are the eligible R&D activities that fall within the specific R&D legislation?” Misunderstanding the definition of “eligible R&D activities” means getting the answer wrong, with the result that some companies either underclaim or overclaim for R&D. Some companies think that all software development is R&D, whilst others think that software development can’t qualify as it is not ‘white coat’ stuff… both scenarios are of course incorrect.
Because of this confusion, HMRC recently created a subcommittee to carry out a detailed review of the guidance on software development. As a member of the main HMRC R&D Consultative Committee, we strongly believe that this is a crucial step.
Having prepared a large number of successful software development R&D tax claims for our clients – ranging from FTSE 250 companies with turnovers over £3700m to new start-up companies with little turnover – we know from experience that a clear and full understanding of the R&D legislation and software development is key to making a successful claim.
Many of our software development R&D claims are for companies for whom software development is not their main trade. However they need to develop new and improved data architectures that can’t be achieved with readily deducible solutions – they’re often pushing beyond the boundaries of existing readily available database engines. For the purposes of a claim, it doesn’t matter whether the software project is intended to result in a product to be used in-house, licensed or sold.
So when determining whether a company qualifies for a claim, it’s not the type of business that’s important. In fact, all you need to consider when identifying any R&D project are the advance being sought, the technological uncertainty around the project, and the boundaries of R&D, specifically:
What matters is the technological input, rather than the commercial output, so we’d consider the following:
R&D begins when work to resolve the scientific or technological uncertainty starts, and ends when that uncertainty is resolved, or when work to resolve it ceases. So, bearing all this in mind, common features in a software project are:
Business requirement-gathering or routine analysis of commercial requirements does not qualify as R&D. This is because routine adaptation of existing off-the-shelf products, and assembling software components to an established pattern, is not considered to be an advance.
