R&D Tax Relief – What IT/software projects and activities qualify?
There are many preconceptions businesses have that they “don’t do research & development” and therefore won’t qualify for Research & Development (R&D) Tax Relief. In this blog, Simon McCarthy within Beavis Morgan’s specialist R&D Tax Advisory team, looks at the various types of IT/software projects and activities applicable for R&D tax relief, and why so many businesses are missing out on this valuable opportunity to get tax rebate/reductions back for their efforts:
“In my three years working in R&D Tax Advisory, I can’t count how many times CTOs, Heads of Development, Technical Leads and Full Stack Engineers of limited companies have told me
“But what you described is just part of my day to day job; surely it can’t qualify as research and development?”
The simple answer to this is that, under HM Revenue & Custom’s (HMRC) R&D Tax Relief legislation in the UK, a wide variety of IT and software related activities can qualify.
It is probably true to say that, if I was to stop and survey a hundred people at random on Oxford Street, the vast majority of those would say that classic or quintessential R&D is scientists, in white coats, sitting in a laboratory, curing killer diseases; or those working in pharmaceutical companies, creating the newest and most innovative drugs. And while they wouldn’t be entirely wrong, the R&D Tax Relief Scheme in the UK has not only been formed to cater for these purposes, but also for a wide variety of industry sectors, such as manufacturing, architecture, product design, food science, and not least, software engineering.
Under the guidelines, to qualify a “project” for R&D Tax Relief, the project must, retrospectively, have sought to or have achieved a scientific or technological advance; whilst encountering significant scientific/technological uncertainty; and whilst being undertaken with a systematic or logical approach.
In the context of software engineering, we can ignore the third criteria, as software engineering is in and of itself a systematic/logical undertaking, with various methodologies available for modern teams to utilise and exploit, e.g. SCRUM, Agile, Lean, Kanban, etc.
With regards to the first two criteria, as they pertain to software engineering, in layman’s terms, what HMRC is asking here is:
(a) “Did you write your own proprietary code (no matter the language) beyond what was available within the public domain of knowledge, i.e. open source frameworks, etc.”; and
(b) “Did you encounter technical challenges that required you and your team to iterate a number of times to reach a viable solution (or not)?”
To this end, there are a number of types of IT/software engineering projects that will qualify under HMRC’s R&D Tax Relief scheme. If you are undertaking any of the following types of work, it is highly likely that you are indeed performing R&D and can benefit from the scheme:
- Extending open source front-end/back-end development platforms/frameworks, e.g. WordPress, Drupal, Angular, Vue.js, Django, Ruby on Rails, etc.
- Performing technically complex and unique integrations between various vendor platforms/internal systems, etc.
- Taking a vendor-based platform and enhancing/augmenting same with proprietary code
- Ground-up creation of unique/innovative systems
- Increasing the technical KPIs associated with your own existing systems
Additionally, HMRC also looks very favourably on claims involving nascent/emerging technologies, e.g. blockchain, IoT, big data, machine/deep learning, etc., as you are pushing the boundaries with regards to same and, as a result, are seeking to further knowledge within the public domain.
Although the information within this blog has focused on the technical side of an R&D Tax Relief claim, it is important to also understand how much tax reduction/rebate you are due back, on the financial side. To ascertain this, please view our up to date tax calculator.”
Furthermore, should you require any additional information pertaining to R&D Tax Relief for software related companies, or any other industry sector, please feel free to contact Simon McCarthy via email at simon.mccarthy@beavismorgan.com or another member of the Beavis Morgan R&D Tax Advisory team for a no-obligation consultancy call.