R&D Tax credits and the software industry
Research and development tax credits for software companies are not claimed as often as they could be, and while many software companies are eligible for them, they are not aware that this financial support is available to them. HMRC is actively encouraging innovation in several areas of technology, and between 2015-2016 a total of £2.9 billion was claimed by UK companies for their endeavours. And, while claim numbers have increased over the past few years, there are still many businesses in the software industry that are missing out.
What R&D work qualifies for tax credits?
Many tech companies are unsure about what they qualify for or if they qualify at all for relief. The government’s definition of what qualifies is deliberately broad, stating that they want to help projects that ‘seek to achieve an advance in science or technology through the resolution of scientific or technological uncertainties.’ This general definition leaves the door open for all sorts of businesses and endeavours to be eligible.
Many companies do not realise that if the project they worked on was not successful, they could still obtain tax relief. The very nature of research and development means that, inevitably, there will be a degree of failure in development. Also, projects that combine current products can also qualify if the outcome is that something truly new and innovative is created.
Some software development projects that are eligible for R&D tax credits include extensions to programming languages, operating systems or database software; means of integrating software and hardware platforms; and innovative methods of protecting, manipulating, capturing and transmitting data. Other R&D costs that are eligible for relief may include software licensing costs; freelance workers/sub-contractors; equipment or materials transformed or used by the R&D process; and staff costs.
Should your company apply for the R&D tax credit scheme?
Research and development tax credits for software companies are available to more projects than many realise, so it can really pay off to investigate whether your company qualifies for R&D tax relief. It is also common for businesses to only submit R&D tax credit claims for a portion of qualifying projects. For instance, R&D tax relief can be claimed for projects that seek to make a significant improvement to technologies that already exist.
Companies eligible under the Small and Medium Sized Enterprise (SME) Scheme can receive an enhanced corporation tax deduction equal to 230 percent of the eligible R&D expenditure. This represents a significant amount for many companies, making an investigation into their eligibility worthwhile.
In some cases, software companies shy away from the in depth research required to create something truly innovative due to working with restrictions on time, resources and/or funds. Given the additional support available through the R&D tax credits scheme, however, this could well be a thing of the past.