R&D Tax Credits for Software Development | Innovation Plus

R&D Tax Credits for Software Development

Claiming R&D tax credits for Software Development are not necessarily easy to understand, in terms of what qualifies. Micah Levy, our Managing Director, explains more below. Micah has been responsible for assisting hundreds of companies with more than £800m of successful R&D claims since 2003, and trained the HMRC R&D specialist units in how to handle R&D tax relief claims for software development.

What is the key to an R&D Claim for software development?

An R&D Tax Relief claim has to be made in a field of science or technology.

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The first stage therefore is to consider what the technological advance and technological uncertainties are from a Computer Science or Information Technology viewpoint, not the features and functionality. This is because you can have two identical applications, as far as functionality goes, but with entirely different architectures, algorithms and developmental challenges behind them. One application may qualify for R&D tax relief and the other one may not.

The consequence of this is that it does not matter if your application is a CRM system, CMS, or any other business application. What it does is irrelevant – what matters is how it does it. For example, a CRM system could require a technological advance if it was a RESTful application providing a highly scalable application compared to say, web services.

The technological uncertainties could be as a result of:

  • Maintaining intermediate states of multi-step dialogues
  • Requiring a JavaScript application on the client and determining if you have to stay on the same page and reload only parts
  • Determining if or how state should be maintained on the client if hidden iframes are used

In addition, basic decisions and development iterations related to overall product architecture, third-party integration, performance metrics, throughput, data structures and algorithms, development platform bugs and/or limitations are commonly seen as by-products of methodical R&D.

While determining the boundaries of an R&D project may be much easier with a waterfall type development methodology with clearly identifiable phases, using Agile methods may be more challenging in determining where the technological uncertainty starts and ends due to the iterative nature of the development process. In this case, the key is often differentiating between the development required to meet user requirements and the development required to resolve technological uncertainty.

If you want to know more about how we can help you claim R&D tax relief for your projects, then call us now.

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If you are already claiming for software development, read on below to see how you can make the process easier.

How to maximise your software R&D tax claims within an Agile environment

*It’s always important that the overhead does not interfere with the development effort. Therefore these may be more applicable for larger companies.

1. Create an R&D champion within your company.

This person should be someone who manages projects and is familiar with the standards and processes of software development in your company.

Ideally, they are a Project Manager who already produces artefacts such as Sprint summaries. As “R&D Champion,” they are the primary resource for all R&D related questions and can enforce the implementation of these ideas through existing and new project management artefacts.

2. Add R&D commenting during source code check-ins.

An example of how an existing development process can be modified to suit R&D purposes is by using source code repository check-ins to document R&D. Your developers may already add their check in notes.

By mandating the use of R&D “tags” with additional notes on experimentation performed leading to the code output you now have a diary of all your R&D results. This repository can then be searched when you need to document and compile your claim.

3. Use of sprint/scrum reports and wiki notes:

Adding three R&D relevant fields in your sprint summaries or scrum reports – R&D: Yes/No; Technological Obstacles; Experimentation Performed- will ensure that you capture the R&D work done within the context of your existing reporting.

You can also add the “R&D” tag to wiki entries that may relate to R&D work. This tag can be easily searched when you need to develop your R&D claim for related sprints or tasks.

4. Source code commenting:

While source code is an accepted form of R&D documentation, it only shows the results of R&D, rather than the process of R&D. Identifying specific algorithms tried and the experimentation undertaken as comments in code is a good way to document the R&D process.

When appropriate, commenting out failed code or iterations of algorithms is a good way to tag R&D work. Adding shorthand to the comments, such as initials of the programmer and dates, can strengthen the reliability of this type of documentation.

5. Email is an often overlooked area of R&D documentation.

You can create a R&D specific account such as rd@mycompany.com and CC/BCC the email when R&D specific emails are sent. Emails that discuss technological obstacles, uncertainties and experimentation are worth documenting as are technical difficulties with suppliers.

This method is a good way to improve your R&D documentation with minimal overhead. This email account can now be retrieved regularly or at the end of the year when you need to compile your R&D claim.


HMRC’s view on R&D Tax claim documentation

Larger claims should, in theory, have more comprehensive documentation. HMRC also expects that larger, more complex software development environments have more mature and formal documentation; if your claims are large, your level of documentation should correspond accordingly.  By implementing these simple steps in conjunction with their existing process, software companies of all sizes can adapt their agile development to improve R&D documentation, resulting in more effective and timely R&D claims.


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