When is software development considered a research and development activity?

Is your company developing software in-house or outsourcing software development? If so, there is a good chance that the work could qualify for research and development (R&D) tax credits.

If your business is striving to overcome technological uncertainty through investment into activities that have uncertain outcomes (such as developing new innovative products, extending frameworks, integrating platforms, or modifying existing systems) then you may qualify for this generous Government tax relief.

The process, product or service can still be an advance if it has been developed but is not publicly known or available.

It is possible to claim for hosting costs which relate directly to the R&D project, but not those relating to business-as-usual activity.

Checklist

1. Your company is subject to UK Corporation tax
2. Your company is funding R&D in-house or via sub-contractors

Click here to calculate your potential tax saving.

Understanding the criteria for defining software development as qualifying R&D activity

Breaking down the larger problem and identifying where solutions are known, or unknown, can establish where the start of qualifying R&D activity lies. HMRC recognises that R&D begins well before the physical development of a product. This includes quality assurance testing, planning, and circumstances where an assessment of technical feasibility is required.

When defining technology and software development as qualifying activity, HMRC states: “The ICT sector is so fast-moving that further advances overtake new and ground-breaking developments very quickly. What is important is that a project represents an advance at the time of development.”

Activities that currently qualify under the scheme in practical terms include:

• initial analysis where discovery questions are being asked regarding specific scientific or technological uncertainties;
• design and development where tasked to resolve scientific or technological uncertainties;
• where software is created or adapted solely as a tool for direct use in a larger R&D project, then development of the software will qualify as part of that R&D project;
• testing the results of the development while the solution has not been found;
• developing new or improved data architectures that cannot be achieved with readily deducible solutions, e.g. pushing beyond the boundaries of existing readily available database engines;
• extending software frameworks (e.g. software development kits, or software libraries) beyond their original design, where knowledge how to extend these was not available or readily deducible at the time;
• attempting to partially or fully solve a technological uncertainty that is documented as a known subject of research by computer scientists (e.g. there are relevant and contemporaneous research papers on that specific scientific or technological issue).