R&D Tax Credits for Software Developers
Funding a growing technology business in London can be a tricky business, you need to evidence traction and convince angel investors, VCs, crowd funding platforms that your idea stacks up. One hidden source of funding we find often overlooked in the software sector is research and development (R&D) tax credits. Upon a successful R&D claim, HMRC will pay out up to 33% of qualifying R&D spend on a software development project, whether it’s successful or not. By overlooking R&D tax credits, these companies are missing out on a significant cash injection of courtesy of HM Government.
Often tech companies are unsure as to where the line is in terms of qualifying activities and which expenses count. It can be a complicated and to some extent subjective in terms of what does qualify. This is where it can pay to bring in expert R&D tax accountants to guide you through the process.
The software project doesn’t have to even be successful, one of the most significant signs that a project may qualify for R&D spend is technological and commercial uncertainty. Failing software projects, although clearly disappointing can be used to fund other projects in the business when you are successful in an R&D tax credit claim, lengthening the runway and potentially negating the need to raise further equity.
So what sort of software projects tent to qualify? Projects should have the following traits;
- It should have been run as a project (agile methodology is fine)
- There is significant scientific or technological uncertainty as to whether the project can be achieved
- An average competent individual in the sector couldn’t undertake the project, i.e. the individuals undertaking the work have experience in the sector that is uncommon. This is a subjective point.
- The project is seeking to achieve an advice in science and technology
These are generic criteria for all industries, but what does this mean for software developers? In our experience, many tech companies will qualify for R&D tax credits to some extent as long as they meet the above criteria and their work is not principally design or UX led. This would exclude most web development and to some extent the UX work involved in app development. Below is a list of the most common activities we see when compiling successful claims for our clients:
- Integration of software components into a single platform, including work involved normalising data.
- Development of new software for the business that’s not available from a 3rd party solution
- Development of new languages or operating systems
- Development of new, custom algorithms to better optimise performance of the software
- Improvements to security or data encryption
- Some forms of video game development such as improved game engines. These projects may also qualify for video game tax relief.
So what can you practically do to ensure that you maximise your chances of a successful claim? There are a number of things that you can do to make your life easier at the end of the year and ensure that no qualifying expense is missed:-
- The project manager should document the project objectives and project approach from inception. Perhaps setting up an R&D project wiki to ensure documentation is maintained throughout the project.
- Ensure that the developers understand the basics of the R&D tax credit rules and source code comments tagged so that the final R&D write up can reference back to the underlying work, mythology and issues faced.
- Use accounting software such as Xero, which enables you to track R&D expenses throughout the project lifetime and not just at the end of the year. This will make the process of identifying qualifying spend much more straight forward at the year end.
R&D tax relief is very generous. The government introduced them to help incentivise innovation in the UK. It is important however to ensure that claims are properly prepared to ensure that you maximise the probability of a successful claim and that you maximise the amount paid out.
Square Mile Accounting is a firm of Chartered Accountants based in London and St Albans. Our R&D tax specialists can help you navigate the complex rules to maximise your chances of a successful claim. If you’re unsure whether you’re able to make a claim, please get in touch and we can talk you through the process.