Approved Accounting – R&D Tax Credit Experts
Software is a universal presence in our everyday lives. Be it cloud computing, app development, website development, data processing, SaaS – software improves the standard of living for millions across the globe and drives business forward in almost every industry.
The software industry is essential to the economic growth of any country, creating employment, improving infrastructure, and bolstering foreign trade. The digital sector was estimated to be worth £161bn to the UK in 2023. That is why HMRC rightly rewards and incentivises advances in computer science, including software development, within its Research and Development (R&D) tax credits scheme.
Many SMEs don’t think they qualify for R&D tax credits and are sadly missing out. By its very nature, software development is forward-looking and requires innovation, so, there is a very good chance that you are eligible for R&D tax relief if you undertake software projects.
Read on to find out if you are eligible for software R&D tax credits and how Approved Accounting can help you make a successful claim.
Which software projects qualify for R&D tax credits?
An important point to remember is that R&D tax credits are not exclusive to R&D software companies. Any organisation that undertakes software development activities with the aim of advancing technology, is eligible.
To make a successful R&D tax credit claim for software development, you will be required to provide detail on the problem you attempted to solve and how you went about it. Your project need not have been successful in finding a solution, but it must meet HMRC’s four-point checklist to be eligible.
You will be required to prove that:
1. Your R&D project identified a technological advance in software development
- You should, of course, be 100% certain that the solution isn’t already out there.
- The advancement should be for the benefit of your field as a whole.
- The advancement may be in relation to a new software product/process/service, or an improvement to an existing product/process/service.
- The advancement must be technological in nature, not merely cosmetic.
2. Your software development project had to overcome technological uncertainty
- In order to come up with a solution, there must have been technological uncertainty to start with. To put it another way, the technological knowledge required to fulfil your aim simply didn’t exist before. You will be required to prove that the uncertainty existed.
3. You attempted to overcome the uncertainty as part of your project
- You will be required to detail your methodology, including experimentation and testing.
- You must show that the intelligence to overcome the uncertainty could only have come from within the course of your research, and not from existing knowledge or capability.
4. The solution could not be reached by another competent expert
- You will need to explain why the solution could only be solved by your team of experts within the course of your project. If your advancement could have been easily worked out by another professional in your field, it will not qualify.
How do I make an R&D tax credit claim?
An R&D claim must be submitted to HMRC with your annual company tax return along with any supporting documentation. Claims can be made up to two years after the completion of a qualifying software project. Claims are typically reviewed and paid out within 28-days.
How is software R&D tax relief calculated?
To calculate your enhanced expenditure you will need to compile a thorough breakdown of the costs directly relating to the R&D project. If you are claiming subcontractor wages, this must be reduced to 65%. Once you have your total, you should multiply it by 86% to get the deductible figure to include in your tax return.
If this doesn’t sound like your idea of fun, then allow Approved Accounting to help take care of the numbers side and submit the necessary paperwork on behalf of your company.
What does it cost?
We will only take a commission if your software R&D claim is successful, based on the tax benefit you receive. Our standard rate is 15%, however, depending on the size of the claim we will be pleased to negotiate that with you.
R&D Tax Credits – Frequently Asked Questions
What does R&D stand for?
R&D stands for Research and Development, and can be defined as any work that is undertaken by a company to advance science or technology. In the UK, HMRC rewards and incentivises R&D in various sectors through the R&D tax relief scheme.
What qualifies for R&D tax credit?
R&D tax credits are available to any company, large or small, that undertakes scientific or technological projects that advances its field as a whole. It could be in relation to a new product, service or process, or an existing product, service or process. This includes, but is not limited to, sectors such as bioscience, software development, manufacturing, food and engineering.
Do small businesses qualify for R&D tax relief?
Absolutely. Qualifying SMEs must have fewer than 500 staff and turnover no more than 100m Euros and a balance sheet of no more than £86m Euros in order to qualify.
How do you calculate the R&D tax credit?
First, you must establish your qualifying R&D expenditure. This is then multiplied by a rate of 86% to give you the enhanced relief amount. Profit-making businesses can use this to offset their Corporation Tax bill. Loss-making businesses can receive an R&D tax credit at a rate of 10% of their enhanced R&D expenditure. This increases to 14.5% for R&D-intensive SMEs, i.e. those whose qualifying R&D expenditure is 30% or more of their total expenditure.
How can I apply for R&D tax relief?
You apply for R&D tax relief as part of your annual corporation tax return. It can be made up to two years following the completion of a qualifying project.
What expenditure qualifies for R&D tax relief?
Qualifying R&D expenses include employee wages and NI contributions, subcontractor costs, materials, utilities (such as gas and electric), and software (providing that the R&D project claims reasonable usage). The nature of the expenditure can have an impact on the amount you can claim and in some situations the cost is restricted. You cannot claim for the expense of production, distribution, patents or trademarks.
Can’t find the answer you’re looking for?
Get in touch with our team, we’ll do our best to find the right accountancy solution for you and your business.
