Can I claim R&D tax credits for website development?

R&D tax credits UK are offered by the Government to encourage innovation of products, services, systems, devices or processes, that lead to an advance in science or technology. Therefore, as long as your website development is advancing technology, you can claim R&D tax credits. However, there is a fine line between what HMRC will and will not accept, so it’s important to be clear on what constitutes an advancement.

Website development is very broad and can cover everything from a simple re-brand to complex applications and API integrations. Any standard developments, such as cosmetic changes, maintaining content, or configuring functionality, are not considered to be advancing technology and would therefore not be eligible for an R&D tax credit claim. But, if the website you’re developing requires the coding and testing of new functionality, you may be able to claim R&D tax credits.

In the US, the IRS has included a four-part test in its R&D tax credit laws to determine what is eligible. While the test does not apply to HMRC, it’s still useful to help categorise your website development work:

• Permitted purpose: is the website development intended to create or improve a product/process?
• Technical uncertainty: does the website development influence the methodology, techniques or formulas?
• Process of experimentation: does the website development use various alternative approaches to model, simulate, or trial prototypes?
• Technological in nature: does your experimentation rely on hard sciences, like engineering, or computer science?

To satisfy this four-part test would require your website development to encompass technical innovation, rather than creative innovation, to prove your project eligible for R&D tax credits. An R&D tax credit specialist can help you determine if your work qualifies under the current rules and advise on any changes to R&D tax credits that may affect your claim.

Explore our R&D tax credit claim services.

What types of website developments are eligible for R&D tax credits?

HMRC does not publish an explicit list of the activities that would be eligible under an R&D tax claim. However, in our experience, the following types of website development projects could be considered::

• Developing new or improving existing software
• Creating a new web-based application
• Designing a custom app for a client
• Improving existing functionality
• Developing or improving technology that delivers a more personalised customer experience
• Integrating disparate data systems in a new or improved way
• Developing cross-platform capabilities across existing or new technologies
• Using machine learning and AI technologies to meet clients’ needs
• Creating augmented reality or virtual reality experiences
• Developing internal tools to support analytics and reporting

Advances in web development don’t have to just be about new features and functionality; it’s equally about improving what already exists. This can mean building on existing knowledge or using current technology in new ways. If in doubt, there are two key questions to ask yourself:

• Is it new?
• Is it an improvement?

If you can answer ‘yes’ to either of the above, it’s worth seeking the advice of an R&D specialist to evaluate whether you have an eligible R&D tax claim.

Can you claim R&D tax credits if a third party did the work?

Yes. R&D tax credits are designed to encourage innovation, regardless of whether the website development work is performed in-house, or through a third party, like an agency, contractor or freelancer.

Under the government’s guidance on R&D tax credits, you are allowed to claim for:

• Up to 65% of relevant payments are made to external agencies
• Subcontractor costs which are incurred by a charity, higher education institute, scientific research organisation, health service body, or an individual or partnership of individuals.

This article covers the 2024 updates on subcontractors in relation to R&D tax claims.

What Qualifies as R&D in Software Development?

Software development can qualify for R&D tax credits UK if it involves overcoming technical uncertainties or creating innovative solutions. Eligible activities may include developing new algorithms, improving system architecture, creating novel programming techniques, or integrating complex technologies. An R&D tax credit specialist can help identify qualifying projects, such as those involving machine learning, artificial intelligence, or advanced data processing.

It’s important to note that routine software maintenance, minor updates, or cosmetic changes typically don’t qualify. Recent changes to R&D tax credits have impacted claims for cloud computing and data costs, making it crucial to stay informed about evolving regulations. To maximise your claim, focus on projects that push the boundaries of existing technology, solve complex problems, or create significant advancements in software capabilities.

Types of R&D Expenditure That Can be Claimed as Part of Software Projects

Types of R&D expenditure that can be claimed as part of software projects include staff costs, such as salaries, employer’s NIC, and pension contributions, as well as subcontractor and freelancer fees. Additionally, materials and consumables used in the R&D process, certain types of software, and utilities like heat, light, and power can also be claimed. An R&D tax credit specialist can help identify all eligible costs, ensuring compliance with HMRC10 guidelines. It’s important to stay updated on changes to R&D tax credits to maximise your claim. By leveraging R&D tax credits UK, businesses can reinvest in innovation and drive growth.

How Much are Software R&D Claims Worth?

The value of software R&D claims can vary significantly depending on the scale of investment and the specific rates of relief applicable to your business. Recent changes to R&D tax credits UK have impacted claim values, making it crucial to stay informed. For SMEs, the benefit can be up to 33% of qualifying expenditure, while large companies can receive up to 13% through the RDEC scheme. From April 2024, all claims will be under the merged RDEC scheme or ERIS for intensive R&D businesses.

An R&D tax credit specialist can help maximise your claim by identifying all eligible costs and ensuring compliance with HMRC guidelines. The financial impact of these claims can be transformative, allowing businesses to reinvest in innovation, hire more technical expertise, and drive growth. It’s essential to consult with an expert to understand how recent changes may affect your specific software development projects and claim potential.

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