Identifying Eligible Clients in Software | Q&A
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A big thank you to all who came to our “Identifying Eligible R&D Clients in the Software Sector” webinar earlier this month! We covered a lot of ground on the topic, from the eyes of both R&D and Software Development knowledge, before opening up the floor to questions which we’ve transcribed below.
For those keen to view the footage in its entirety, we’re attaching a recording of the webinar: click here to access the password-protected recording (Password: E4^RT&vS).
If you’d like to attend future webinars run by WhisperClaims please subscribe to our mailing list at the bottom of this article for notifications on when we’ll be running our next events, and where to register.
Now, without further ado…
Your Questions Answered
1) A few clients choose to capitalise software as an intangible asset. Is the amortisation of this asset an eligible cost for an R&D claim?
Yes! As long as the costs meet the criteria for allowable R&D costs and are revenue in nature, the amortisation of these costs can be included in an R&D claim. In fact, s1308 CTA 2009 allows for the entire amount to be written off in the first year and included in an R&D tax relief claim.
2)What about if you are using open-source packages e.g. Python machine learning libraries in your software development? Would this quality for R&D tax relief?
As always, this is an ‘it depends’ answer. Using libraries to build software will reduce the eligibility of the project, because these libraries enable developers to quickly and easily add functionality to their software without having to code it themselves. However, given that this is open-source software, if the developers were to expand or improve the functionality of the library, then there might be scope for them to be doing eligible work.
3) In subcontracted software development, would it be necessary for the R&D to be contractually subcontracted i.e. the client must know a technological advance is required in advance of contracting the sub-contractor?
In an ideal world, yes! This would mean that there was no confusion about whether R&D was necessary, and who ‘owns’ the R&D for the purposes of R&D tax relief. Sadly, these kinds of contracts are not common, and there is often a lot of ambiguity around the need for R&D and who can claim for it in the end.
4) I have a client that uses off the shelf software, but has implemented green resources as energy for this. They lease the equipment for this and then host the websites through this source. Would any of this qualify, especially the green energy?
Almost certainly not. This is a great example of something that’s commercially but not technically innovative. Using off the shelf software and leasing equipment wouldn’t qualify for R&D tax relief, and simply hosting websites using this innovative setup wouldn’t involve any eligible work, unless they were required to do work to, for example, deal with power fluctuations caused by the use of green energy.
5) As a WhisperClaims customer, if I need some help establishing whether my clients’ projects are eligible before I start putting a claim together, can you help me?
We can! We’ve just launched a ‘Client Review’ service, where one of our support staff work with you to identify which clients in your client base are likely to be doing eligible R&D work. To enquire about whether this service might work for you, contact or support team on firstname.lastname@example.org.
6) HMRC sometimes challenge on the basis that a new product is not inherently R&D, even if it does things that no competitor currently does. They then request evidence of the improvement in the underlying science. How do you get clients to articulate this, especially when clients tend to think in terms of what the software can do for them and how it gives commercial/competitive advantage?
Having prepared hundreds of claims for many, many companies, I agree that this can be the most difficult part of pulling together a claim! My top tips would be to try and get access to the people actually doing the day-to-day work on the project – they’ll have a much better idea of the challenges and improvements than the MD/FD. My favourite questions were ‘What did you learn during this project that you wouldn’t want your competitors to know/” and ‘what do you know now that you didn’t at the start of the project?’.
7) We have had HMRC suggest that R&D done by one of our clients in the provision of software products is subsidised R&D simply because our client is being paid for their output. This is not specifically subcontracted R&D. What are your thoughts?
We’ve heard tell of this shift in HMRC’s application of the guidelines a few times recently, and it’s a tricky one. Where a company is paid in advance for the delivery of a product that requires some R&D to be carried out for it to be produced successfully, then I can see where HMRC is coming from to some extent – the company has received some money for the work, so it could be seen as subsidised. However, if the company doing the work is doing this at their own financial and commercial risk, then it’s also hard to argue that the R&D has been subcontracted to them, or that it belongs to the company making the payment. If and when we see or hear more about this, we’ll update our users!
8) Due to COVID there has been an increase in Software Development to replace or reduce face to face meetings, such as for Doctors, Training Services etc. Would these projects qualify for R&D?
This is another ‘it depends’ answer! If it’s simply a case of people adopting new working practices and software (such as Zoom) to support this, then it’s unlikely to be eligible. However, if, for example, providers of practice management systems for GPs did work to integrate video calling into their software to enable GPs to have video calls with their clients whilst maintaining security and confidentiality, then there’s potential for eligible work to have been carried out.
9) I have a manufacturing company client that is developing a specific piece of software which we believe comfortably meets the criteria for R&D. My query is in relation to grant income received in the year. They received a non-project specific grant and have also received payments as a result of staff being placed on furlough. The money was all paid into general current account so very difficult to say what it was spent on. How does this affect their ability to claim? Grant income represents less than 5% of turnover.
First things first – furlough payments don’t affect a claim, they just have to be excluded from the costs.
On the grant, the fact that it has been put into a general pot of money shouldn’t matter as much as the original intent of the grant, and what the award letter states it is to be used for. So if, for example, the grant was awarded specifically for business development, then it won’t affect the claim. What advisors need to do in these scenarios is establish what the grant money was intended for, and then just make sure that this doesn’t overlap with the R&D projects. As long as there’s no overlap, you should be able to disregard the grant when claiming R&D tax relief.
10) From your experience, where do you stand on claiming software licenses and a share of software costs? We’ve had expenditure for software used in the development of projects including AWS, O365, Adobe CC, CAD/CAM etc. HMRC define it as “reasonable share of costs…” which could mean anything.
Before I get into the details of this answer, it’s important to point out that cloud computing costs cannot currently be included in a claim – the guidelines were put together before cloud computing became widespread, and as such haven’t been updated to reflect the currently realities of software use in business. This means that, in the examples used above, AWS and Office 365 costs could not be included in a claim.
Once you’ve identified which software costs are eligible, you’re then confronted with the ambiguous term ‘reasonable share’, which is ambiguous at best. Our advice in these circumstances is to come up with some reasonable basis for your apportionment that makes sense in the context of the specific claim and use this to calculate how much of the cost to include. For example, software that is used for both R&D and non-R&D work could be apportioned based on the overall staff apportionment to R&D – if the staff spend 20% of their time on eligible R&D activities, it would seem reasonable to claim 20% of the costs of that software package. On the other hand, if a software package is bought solely for use by R&D staff, and only used for R&D activities, then an apportionment of 100% might seem reasonable.
11) Would you agree that the term ‘advances in computer science’ is a judgement call? Very few projects actually further ‘computer science’, but there are a lot that ‘develop’ further current technology, processes, procedures etc.
Absolutely! For any R&D project, the claimant company and HMRC are reliant on the options of ‘competent professionals working in the field’ to know whether a project has really advanced science or technology, and this is what can make preparing R&D claims tricky. CIRD81900 states:
‘The question of what scale of advance would constitute an appreciable improvement will differ between fields of science and technology and will depend on what a competent professional working in the field would regard as a genuine and non-trivial improvement.’
‘There will be scientific or technological uncertainty if a competent professional working in the field cannot readily deduce how the separate components or sub-systems should be combined to have the intended function.’
As you can see, HMRC’s own guidelines are clear that the advances and technological uncertainties can only be judged by the competent professionals. Even when it comes to the guidance about how a claim is examined (CIRD80500), HMRC states that they will seek to understand ‘why the knowledge or capability sought was not readily deducible by a competent professional in the field’.
However, having said all of that, it’s still important that advisors understand the guidelines and are able to work with claimant companies to help them understand what is meant by an advance and which of their projects meets HMRC’s criteria.
12) If the client is unaware of the technological advances, does the R&D therefore lie with the subcontractor?
In our opinion, yes! If the subcontracting company doesn’t know that technical advances are being made, then the R&D and the ability to claim for R&D tax relief should sit with the subcontracted company. As discussed above, there’s a chance that HMRC would see this as subsidised R&D, but this will depend on the contractual arrangements between the two companies.
13) Can we capitalise an asset and claim R&D?
In short, it depends on the type of asset. If it’s a tangible asset used for R&D, such as laboratory equipment, then you can’t include this in an R&D claim because it’s not revenue in nature and doesn’t touch the P&L. However, your client might be able to include these costs in a claim for R&D Capital Allowances
If R&D costs have been capitalised as intangible assets, then you should be able to include these in a claim for R&D tax relief, as described above.
14) Where a clearly R&D software project includes things like adding multiple languages to the software does that qualify for R&D?
Probably not! Within any R&D project, there will be eligible work and non-eligible work, and this is a good example of this. In the production of this software, the company might be required to add additional languages, but this will not require advances to be made or the resolution of technical uncertainties, so this part of the project could not be included in the claim.