How eligible is the Software Sector in qualifying for R&D claims?

Identifying in-eligible clients in Software Development

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Something we hear time and again from our clients is that they struggle to identify clients in their client base who would be eligible to claim R&D tax relief. So, in this blog series, we’ll be digging into some less obvious sectors and discussing what to look for when assessing eligibility!

In the latest of this series, we’re taking a completely different approach and tackling the big one – software development! As with our previous subjects, the level of eligible R&D to be found in this area is misunderstood, and very, very often overestimated. In fact, we’d go as far as to say that this is the most overclaimed area in the whole of the R&D tax relief world! That’s why this time round we’re going to focus on how to identify which software clients and projects are unlikely to be eligible for R&D tax relief.

Software installation 

First things first – software installation, implementation, configuration projects. Whatever you call it, it’s almost certainly not eligible. In fact, it’s the perfect example of taking something off-the-shelf and optimising it for a particular set of requirements. No matter how technically complicated this is, using software for the purpose for which it has been designed will not qualify for R&D tax relief. In fact, taking off-the-shelf software and using it for a new purpose would also not qualify, unless significant software development work was required and an advance made in software science.

Subcontracted software development

Following on from installation projects, let’s talk about subcontracted software development. Now, we know that software development being subcontracted doesn’t make it ineligible, but hear us out! There are many, many companies out there that, when they can’t find off-the-shelf software that fits their needs, subcontract the development of the perfect system to another company. The danger here is that the subcontracting company usually doesn’t know whether this development is straightforward for the software development company, or if they’re having to do eligible R&D work to achieve the desired outcome. In our experience, when you peel back the layers of these projects, you very often find that the software development company is able to deliver the project by tweaking and reskinning existing products and components, even where the outward functionality seems very different. 

For any software development project, HMRC would expect the claimant company to produce, if requested, a competent professional in software development to articulate exactly what advance was sought and what technical difficulties were encountered during the project. If you’re not confident that your client would be able to do this, it may not be worth the risk of including software development projects in a claim.

Search Engine Optimisation

Several years ago, every second software development project focussed on search engine optimisation (SEO). It was very much the hot topic, and most of these projects had some eligible elements. Now, however, SEO has become a very standard practice, with various algorithms and tools available to make this straightforward, and it’s highly unlikely that any work done in this area would constitute eligible R&D. This even counts for those times that Google updates its algorithm – methods for reverse engineering the algorithm have become so established that it’s very hard to argue that this represents an advance. 

More generally, this is a common theme in software development eligibility. The technology in this sector moves so quickly that work that was highly eligible can become standard and routine within a few years, so it pays to keep an eye on your clients’ software claims and make sure that they haven’t become outdated!

Software Integrations

An area of software development we are regularly asked about is integrations, and, like SEO, it’s something that’s becoming less and less eligible over time. A few years ago, integrating disparate software systems was difficult – public APIs were few and far between, and there were few tools that could be used to make the process easier. However, things are very different now! Most software systems provide a public API, and there are several third-party tools that automate the process of integrating web apps. This is becoming a very established process, and it’s rare to find software integration projects that require an advance to be made in software science.

NoCode movement

Jumping to the very cutting-edge of the software sector, we find the NoCode movement, which is exactly what it sounds – the rise of platforms and techniques that enable non-technical individuals with no experience of software development to build software. Although this is a fairly niche area at the moment, it’s growing fast due to issues around hiring experienced developers etc. The key point to make here is that no software projects built using these NoCode platforms will be eligible for R&D tax relief, as by definition they do not seek to make an advance in software science or technology, no matter how innovative the functionality produced.

Software development – functionality and innovation

One last word on software development as a whole; for any software project, the most important thing you can do is to look beyond functionality when assessing eligibility. A company might be able to produce software that is hugely innovative in terms of its functionality, but that could be developed using established techniques and knowledge. Even though this software would therefore be commercially innovative, it wouldn’t qualify for R&D tax relief. On the other hand, it’s just as likely that a company could produce software that on the face of it appears to have no new functionality at all, but that achieves this functionality in a way that incorporates an advance in software science, for example by using newly developed algorithms that enable calculations to be done 10x faster than the standard. Even though this work might not look innovative from the outside, there’s a good chance that it would qualify for R&D tax relief. 

Identifying Eligible Clients in the Software Sector

We’re also covering R&D eligibility in the Software sector at our webinar next week!

As you might have already read, this is a large topic, so we’ll bring more examples to the table in this discussion on top of addressing specific questions from the audience on the day.

Attendance is free! Click here to book your spot while you can. 

How to write an R&D tax relief technical narrative

With HMRC’s new mandatory requirement for project descriptions on all submissions, we wanted to share our experiences to help others to write their best possible technical narratives.

Available to download here.

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