We rely on software throughout our day to day lives, from the programme that powers traffic management to the smart TV we watch while we have our dinner. Because of this daily interaction with the software industry, we understand how fast it can move, how quickly technology becomes obsolete or needs to be updated, how new and better options emerge every year.
The software industry is built on research and development. It relies on experimentation, on innovation, on seeking new, better, smaller, more powerful. It drives Industry 4.0, bringing us AI and machine learning, cybersecurity, cloud computing, robotics, data processing and storage technology, the connected world of the Internet of Things, and virtual and augmented reality.
This constantly innovating world requires a lot of investment, and software SMEs are often on the hunt for new revenue streams to reinvest in the business. The good news for software companies registered in the UK is that the innovation so inherent in their business means that they could have access to tax relief from the UK government.
What are R&D tax credits and who qualifies for them?
HMRC’s R&D tax credits scheme rewards UK businesses for innovation. Though exactly what classes as “innovation” for research and development is kept deliberately vague by HMRC in terms of tax relief eligibility.
Since its launch, more than 300,000 claims have been made, totalling more than £33.3 billion in tax relief. This tax bonus can then be reinvested into the business, either for more innovation – and therefore more access to tax relief – or to help get the business through a rough patch.
Some of the costs that claims can cover include:
- Staff salaries, NI, pensions and expenses spent on R&D
- Time and resource spent on defining objectives, feasibility studies
- Software downloads and subscriptions, apportioned for subsequent use
- Subcontracting costs
- Utilities such as water and power
- Materials and consumables
- Prototype development
- Project planning, administration, finance and personnel services
- Training to support R&D
What activity can qualify for R&D tax credits in the software sector?
The nature of much of the software industry is research and development – it’s coming up with an idea, testing its efficacy, developing and building, then testing some more. Software development companies, software houses working with SaaS or ERP systems, and any business performing a bespoke software project are considered part of the software industry by HMRC.
Given its natural innovation, this sector is one of the largest beneficiaries of R&D tax credits claims, receiving 23% of all SME claims processed with HMRC in the 2018-19 tax year. Many of these claims were related to everyday business operations for the companies involved.
Activities within the software sector that could qualify for R&D tax credits include:
- Software code changes to new applications
- Tools to extend the functionality of software or an operating system
- Creation of programming interfaces, tools, SDKs or APIs
- Innovative methods to capture, transmit, manipulate and protect data
- Integration of hardware and software platforms to deliver new solutions
- Development of complex algorithms, methodologies and analytics
- Creation of advanced technical features and functions
- Implementation of existing software to be used in a completely new way
- Use of software to improve computer processing or storage efficiency
- Data processing and hosting solutions
- Software for interactive leisure and entertainment, business and domestic use
- Development of computer games
- Wireless, satellite and other types of telecommunications
- Computer consultancy
Yet despite the natural innovation so inherent to the industry, many software businesses, are not claiming R&D tax credits from HMRC. This is leaving resources on the table when it could be getting invested into the businesses.
Why don’t more businesses claim this tax relief?
Software companies are built around experiments and evidence, so let’s present three hypotheses to highlight the under-utilisation of R&D tax credits in the sector.
First, software SMEs don’t believe their activities would qualify for tax relief under HMRC’s definition. This is unlikely, given software is at its heart a research and development industry.
Second, software SMEs simply don’t know the tax relief exists and is available to them. This is a more likely hypothesis, as the world of tax and accounting is often left to those with more knowledge of the intricacies of the work. The SME may accidentally stumble across the R&D tax credits scheme while searching for new funding streams, or might hear about it at a conference, for example.
Third, and finally, software SMEs are aware of the R&D tax credits scheme and believe they could qualify, but they just don’t have the time or resource to invest in the complicated application process. This is also a likely hypothesis, as it can take an expert eye to comb over a business to identify exactly what elements of a project could be counted towards the total project cost for an R&D tax relief claim. Perhaps they tried once before and were rejected, and so gave up on future claims.
If that’s the case, it would be a mistake to give up. HMRC’s R&D tax credits scheme is very accessible, and there are independent third party partners available to help walk a software SME through the process to maximise the chances of a successful claim.
Where can you go from here?
What qualifies for tax relief under this scheme is not always straightforward, but Easy R&D is solely focused on these types of claims and understands what it takes to put together a successful claim for R&D tax credits.
We work in partnership with the leaders of SME businesses, guiding them through the five easy steps to a successful R&D tax credit claim:
- We’ll chat about your projects
- You upload the necessary information to our secure portal
- We analyse the data on your behalf
- We submit your R&D tax credit claim with HMRC
- HMRC reviews your claim, and will notify either you or us if a repayment is due.
Our expert team of consultants carry out the majority of the claim process, keeping client commitment to a minimum and maximising the claim value that can be received. We work hard for our clients so they can in turn put more back into their business, helping them to focus on what’s most important: growing their business.
Get in touch with our team for a free consultation and find out how you can claim R&D tax relief for your software business.
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