R&D Guidelines for Software Development Projects

The UK’s research and development (R&D) tax credits scheme has provided billions of pounds worth of funding support to innovative British businesses over the years, including tax credits for software research and development. HM Revenue and Customs (HMRC) is responsible for overseeing the R&D tax relief system, giving businesses tax reliefs and corporation tax incentives. According to data published last year by HMRC, some 22,445 R&D tax credit claims were made in the 2014-15 financial year, and a wide variety of software development projects were included in the 5,165 claims filed under the 'Information and Communication' sector.However, the Department for Business, Innovation & Skills (BIS) suggested there were 5.5 million active businesses in the UK in 2022, with 196,000 of those businesses existing within the ‘Information and Communication’ sector.If we conservatively estimate that 20% (14,500) of all firms in ‘Information and Communication’ conduct research and development projects into the science of technology to improve applications, we can therefore conclude that some 9,000 software companies could be eligible for R&D tax relief but are failing to claim.

What is R&D Software in development?

• The development of new state-of-the-art software to assist with key operational tasks
• The design and development of ‘add-on’ tools or plugins to enhance the functionality of existing applications
• The implementation of extensions to existing database software or operating systems
• Research and development into innovative data capture methods
• Research and development into innovative data management techniques and representations
• Conducting feasibility studies for potential software ideas
• Analysis of new and competing technologies
• Product or software testing
• The creation of technical specs to underpin an R&D project
• Necessary training to support the use of R&D

Who qualifies for software development R&D tax relief?

• Employed staff costs, e.g. gross wages, employer’s National Insurance and employer’s pension contributions
• Agency staff
• Subcontractors and freelance professionals
• Software licensing fees
• Consumables, e.g. lighting, heating and power

There are two types of R&D tax relief available to software developers, relative to the size of your business:

• SME R&D Relief

This is available to those with fewer than 500 employees and a turnover of under €100m or a balance sheet total under €86m. Companies can deduct 130% of their qualifying costs from their annual profits, alongside the normal 100% deduction. SMEs can also claim R&D relief if it is loss-making, worth up to 14.5% of any surrenderable loss.

• Research and Development Expenditure Credit

Larger companies with more than 500 employees can claim RDEC. This is also available to those who have been subcontracted to undertake an R&D project by a large company. RDEC equates to an 11% tax credit of all qualifying expenditure.Before working with us, the majority of Kene’s clients were not only unaware that R&D tax credits for software companies existed, but also that their business was eligible to claim for R&D tax relief. In recent years, we’ve helped many innovative software development companies access thousands of pounds of Government money. This fund exists to reward those prepared to invest time and effort into R&D, therefore pushing the boundaries of their industry.We’ve created a quick test for the software industry to help you find out if you’re eligible for R&D tax credits, or one of the other government incentive schemes. Take the test here.