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Which software development activities qualify for R&D Tax Credits?
Software technology is advancing at an ever-increasing rate as the need for people, businesses and – ultimately – data to be connected to each other becomes more imperative, a concept which is unlikely to change anytime soon. Whilst most new products have ready-to-use interfaces to connect with other devices, others require additional development within a test environment to programme interoperability and those intended to interface with the most advanced technologies – such as AI, robotics and augmented reality – may have to be updated or redeveloped completely. Whilst the base legislation remains unchanged, the rate at which the sector is advancing has driven HMRC to implement new guidance for companies looking to claim R&D Tax Credits, with greater focus on
- the baseline knowledge widely available at the commencement of the project; and
- the underlying technological advance rather than the commerciality of any output
The latest round of HMRC statistics show, for the full tax year 2016-17, that 12,410 software claims (23.8% of the total) were successfully filed for a combined relief to businesses of £805m (22.9%), an average of £65k per claim. Interim figures for 2017-18 already show over 11,600 successful claims processed so far generating a combined value of £820m, an average claim value in excess of over £72k.
What type of software activities qualify?
Software applications touch most businesses, either directly or indirectly, in the pursuit of providing the product or service which forms the basis of their trade; specific examples of where software R&D would be considered to have occurred might include;
- Data processing and storage – how systems search for and interpret data
- Artificial intelligence (AI) – enabling computers to make decisions based upon outcome probability in complex scenarios
- Video/online gaming – where software development enhances user experience
- Cloud computing – covers a wide range of compliance, from building the cloud software from scratch to allowing disparate packages to work together
- Integration of software applications and tools to advance system capability
- Development of new software to assist with operational automation and key tasks
- Developing new or improved data architectures that cannot be achieved with readily deducible solutions
- Extending software frameworks beyond their original design
What types of expenditure can be included?
‘We’d been approached on several occasions in recent years by other service providers regarding R&D Tax Credits, but none were able to reassure us as to why we might qualify or convince us that the process itself would not impact on our primary focus to move our business forward… until we met with Innovation Tax. From the outset, they were professional, efficient and totally transparent, securing us an unexpected financial boost with minimal effort on our part. We look forward to working with them again later this year and would certainly recommend their services to companies like ours’
Li Ju, Managing Director of POGO Digital Ltd