Understanding the role of R&D in the software development industry

24 October 2023

Businesses are increasingly utilising and expanding their technical activity to keep up with the pace of digital transformation, provide a competitive edge, streamline operations, and reduce operational costs. R&D in software development is transforming the capabilities of the information technology industry. Whether you’re fully focused on developing software or you created a tool to help you with a project and therefore it was only a part of what your business does, you could receive a financial boost from R&D tax credits, a reward for your innovation. Let’s find out more about the role of R&D in the software development industry.

What is R&D in the software development industry?

Research and development is a core component of software development. Software is made to address specific business challenges such as effectively managing data to speed up decision making and prevent human error. The activities involved in developing software meet the criteria of R&D tax credits:

Innovation and advancement

Software development often involves creating new or improved products, services, or processes, which align with the goal of R&D incentives.

Technical uncertainty

To qualify for R&D tax credits, a project must address technical uncertainties. Software development projects frequently encounter challenges and uncertainties related to complex algorithms, coding, system architecture, and more.

Experimentation

Developing software often includes trial and error processes with various approaches and iterating to find the best solutions to complex problems. These efforts could entail experimenting with different algorithms to find which one increases performance at the best rate.

Customisation

Eligible research and development activity doesn’t just include creating brand-new software. If you customise existing software to meet the needs of a different sector or improve the functionality of existing software by adding an integration, this would also count! 

Essentially, if you have spent money on software development for paying staff involved (including their managers), subcontractors, externally provided workers, cloud computing and data costs, or other eligible R&D costs, then you could potentially retrieve some of the money you spent back. The latest rate for SMEs is a cash benefit of 18.6% for loss-making SMEs, a 21.5% corporate tax reduction for profit-making SMEs under the SME scheme, and a 20% enhancement rate for larger companies under RDEC.

What does R&D in software development look like?

We have compiled some examples of advancements in software development that can be considered as R&D. The list is not exhaustive. Let’s discuss them one by one:

Develop software to test the functionality of machinery for your project

This involves creating custom software tools to assess and enhance the performance of specialised equipment, optimising processes, and reducing downtime, ultimately contributing to technological advancements and operational efficiency within your specific industry.

Integrating advanced technologies into software development

Improving or creating software that involves: 

• Artificial Intelligence (AI) and Machine Learning (ML)
• Cloud computing
• Data processing and storage technologies
• Internet of Things (IoT)
• Augmented Reality (AR)
• Virtual Reality (VR)

Developing advanced algorithms for medical image recognition

This would take place in the healthcare industry and allow for more accurate and efficient diagnoses from X-rays, MRIs, or CT scans.

Creating software for precision agriculture

This software would integrate data from drones, sensors, and GPS to optimise planting, irrigation, and harvesting for higher crop yields and reduced environmental impact.

Designing self-driving car software

This automotive software relies on machine learning, computer vision, and sensor fusion to improve safety and efficiency on the road.

Transforming gaming applications with software solutions

Creating immersive experiences and real-time interactions with cutting-edge graphics that have been developed with virtual reality (VR) and augmented reality (AR). 

Improving fraud detection in finance

Taking risk analysis to the next level by building sophisticated algorithms that enhance the security and efficiency of financial transactions. 

These examples showcase how software development plays a crucial role in advancing various industries through research and development efforts. To see an example of a qualifying R&D software development claim and how an R&D tax credit specialist succeeded in retrieving the benefit, read our case study.

Who qualifies for R&D in the software development industry?

Any company engaged in software development may be eligible for R&D tax incentives, including:

• Software development firms – Typically, businesses with teams of developers assisting other companies with their software projects.
• Software companies – These entities may develop and refine software, offer Software as a Service (SaaS), business solutions, or enterprise resource planning (ERP) systems.
• In-house software developers – Any business undertaking customised software development projects in-house.

The scope of qualifying R&D activities is extremely broad so it’s always recommended to check eligibility with an R&D tax credit specialist to ensure you don’t neglect a worthwhile claim.

Takeaways

In conclusion, R&D plays a crucial role in the software development industry by driving innovation, addressing technical uncertainties, and fostering experimentation. This not only helps businesses stay competitive and streamline operations but also makes them eligible for R&D tax credits. Whether it’s customising software, integrating advanced technologies, or developing algorithms for various industries, software development activities can qualify for tax incentives. Companies engaged in software development, including software development firms, software companies, and in-house developers, may all be eligible for R&D tax credits. To secure these credits, it’s essential to prepare a comprehensive claim with technical documentation that meets HMRC’s standards.

How to secure R&D tax credits for software development

To receive the financial benefit of R&D tax credits for software claims, you need to prepare an R&D claim for the scheme you’re eligible for. This involves presenting all your R&D costs as well as in-depth technical documentation that showcases your project. HMRC requires complete visibility into the methodology used for software enhancements, the encountered challenges, and the strategies employed to resolve them. It’s important to meet HMRC’s standards within the claim to keep the process simple and prevent any costly and time-consuming enquiries. 

At Alexander Clifford, we have extensive experience in R&D tax credits in software development, securing our client base with fantastic news time and time again. The structured processes our expert team follows have unlocked remarkable success in recovering overlooked R&D tax credits for our clients, and we take pride in assisting them in optimising their financial returns and obtaining the rewards they are entitled to. It’s your turn to benefit from R&D so get in touch!