R&D Tax Credits for Software Development

Research and Development (R&D) tax relief is just for scientists, right? Not at all. If your SME invests in software development and innovation, you could be eligible for a generous R&D tax credit.

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 is worth more than £400 million per day to the UK, with a growth rate of six times the rate of the economy as a whole. 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.

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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 does software R&D tax relief work for SMEs?

R&D tax relief is comprised of two schemes, one aimed at SMEs (Small to Medium-Sized Enterprises) and one aimed at larger companies. Here at Approved Accounting, we specialise in R&D claims for SMEs, although we are well-versed in both schemes.

To qualify, your SME must:

  • have fewer than 500 staff
  • have a turnover of under £86m
  • should not be receiving state aid towards the project for which you are claiming

SME tax relief for software development can be broken down into two components:

1. Enhanced expenses relief

Under the R&D scheme, you can claim an extra 130% of eligible expenses from your yearly profit before it is taxed, at the current rate of 19%.

Allowable R&D expenditure includes:

  • Employee salaries and NI contributions – this includes support staff as well as technical staff, as long as the work they undertake is directly for the project.
  • External agency and subcontractor costs – you can claim 65% of the cost of hiring external staff to work on your software project.
  • Materials – this includes physical materials, consumables, utilities and software licences, as long as the project takes up a reasonable share of its usage.

2. Tax credit

If your company is making a loss then the allowable loss can be surrendered for a tax credit at the rate of 14.5%, or, the loss can be carried forward and offset against future profits your company may make.

It is important to note that here the tax credit might not always be the best course of action. Whilst you will benefit from a cash flow improvement, the relief offered is at a lower rate. This is why it pays to seek professional advice so you make the most profitable decision for your business.

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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 130% 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.

Recent changes to the SME cap on R&D credit

Up until 2020, there was no limit to the amount of R&D tax credit that SMEs could claim. Due to abuse of the system, the government made the announcement in the 2018 budget that the legislation would change from 1 April 2020. It stated that R&D tax credit would be limited to three times the company’s total PAYE and NIC liability for that year.

Fast forward to the Spring Budget of 2021, SMEs applying for R&D tax credits will be eligible to a maximum of £20,000 in repayments per year plus three times the company’s total PAYE and NIC liability. So, it’s slightly better news for SMEs when it comes to claiming R&D.

The recent changes could prove problematic for genuine claimants that don’t pay themselves a salary as a company director, or employ minimal staff. If this applies to you, then we strongly advise seeking our professional advice to avoid cash flow issues and ensure your claim is approved.

Make a successful R&D tax credit claim with Approved Accounting

Approved Accounting can help you to navigate software development R&D and make a successful tax relief claim. Should you choose to work with us, this is our tried and trusted process:

We will take a look at your company’s software development projects and identify those that can be qualified as R&D.

We will consult with you and your experts, to understand the technical aspects of the project(s).

We will help you to compile the fundamentals of the report to submit to HMRC.

We will review and analyse the expenditure for the qualifying project(s), then calculate your claim.

With your approval, we will submit the claim as part of your corporation tax return. There is no need for you to process anything, we will do it all on your behalf.

At Approved Accounting, we know the R&D scheme inside-out and will provide professional guidance to ensure the best chance of success. We will also save you valuable time and effort, so you can get back to doing what you do best.

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.

Contact us today and receive the R&D tax relief you deserve

Approved Accounting has extensive knowledge of R&D tax credits for software development projects, and has been successful in making claims for many SMEs. By undertaking software R&D, you are contributing a great deal to the economy and to individuals, so we are passionate about getting you the tax relief you deserve.

Why not get in touch with us to find out if your software projects are eligible for R&D tax credits. We look forward to hearing from you.

R&D Tax Credits - Frequently Asked Questions

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.

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.

Absolutely. The government R&D scheme is comprised of two schemes, one for SMEs and one for larger businesses. SMEs must have fewer than 500 staff and turnover no more than £86m in order to qualify.

This is not a straightforward question! The difficulty here is not in the calculation of the credit but in identifying the allowable costs and to what extent these costs can be included. Once this figure is arrived at this is multiplied by a rate of 130% to give you the additional enhanced relief. It is here where some expert tax planning is required as the there are a couple of options available, you can either carry losses forward to offset against future profits, offset against current tax liabilities or use these losses for a payable tax credit at a rate of 14.5%.

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.

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.

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