R&D tax credits are offered by the UK 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 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.
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.
Website development can be defined as advancing technology, i.e. if it is new or an improvement upon existing technology or methods, it may be eligible for claiming tax credits.