Can you claim R&D tax credits for software development?

If you’re seeking to resolve a problem or overcome an obstacle in your field, your work could qualify for R&D tax credits. Software development projects that tackle genuine technological uncertainties, not just routine coding or upgrades, will likely meet HMRC criteria.

With software innovation continuing to fuel the UK economy more than ever, it’s never been a better time to claim R&D tax credits for software development. But there are a few complexities you need to be aware of. From HMRC’s AI-driven risk checks to the April 2024 launch of the merged scheme, claiming can be a challenge.

We’ll discuss the practical, up-to-date information you need to know about R&D claims for software development, from how to identify your qualifying costs, to how to claim software R&D tax credits while making sure you get the maximum eligibility.

Is my project eligible for R&D tax credits for software development?

In order to qualify for R&D tax relief for software development, you need to make sure you fulfil criteria laid out by the CIRD (HMRC manual) and provide reasonable evidence of this in your claim.

HMRC’s guidelines for software R&D: two core criteria – the statutory definition

HMRC guidelines state that in order to qualify for R&D tax credits, your work must:

1. Create an advance in science or technology – This means you must intend to make a real advance in your field to better the industry of software development
2. Resolve scientific or technological uncertainty – This means that you must seek to solve an issue or answer a question which has previously remained unknown

When claiming R&D tax credits for software development, qualifying factors will need to be laid out in your additional information form. The more documentation you’re able to offer, the better chance you have of being able to prove this if HMRC make enquiries.

How do I distinguish between R&D for tax credits software development and routine development?

There are a few grey areas when it comes to deciding if your project meets HMRC definitions of R&D tax credits for software development. 

The competent professional test is a measure used to decide if the issue or uncertainty you’re solving is really a legitimate hurdle in the field. The test asks if a competent professional in your field could easily and publicly solve what you set out to. 

If the answer is yes, it’s not R&D – as it’s not a genuine problem or question. If the answer is no, it is classed as R&D.

HMRC describes a ‘competent professional’ as someone who:

• Is knowledgeable about the scientific and technological principles involved in your project
• Is generally aware of the current knowledge in your field
• Is experienced and successful within your field

Your project doesn’t need to succeed to qualify – failed, abandoned and loss-making projects are still considered valid R&D if you were genuinely trying to resolve an uncertainty.

When does R&D begin and end?

When claiming R&D tax credits for software development, R&D starts when you begin to work to overcome the scientific or technological uncertainty, and finishes either when you’ve achieved what you set out to do, or when you end the project.

Start: You first identify the scientific or technological uncertainty that you begin working to solve. This is usually during the testing and prototyping stage of your software project. This moment of identification is your “project baseline.”

End: When you reach a resolution to your project and have achieved your goal – HMRC defines the end as ‘knowledge is codified’ in a way that can be used by a competent professional. This means you put your discovery into technical documentation, published results, software codes or algorithms. The end point could also be when your prototype or pilot plant is produced. It also ends if you abandon or fail to resolve the issue. 

Which activities and costs are eligible for R&D for software development?

When it comes to claiming R&D tax credits for software development, HMRC looks closely at whether your project pushes the boundaries of what is technically possible, rather than simply delivering a commercial outcome. 

Qualifying software R&D examples in the UK

For your software project to qualify for R&D tax credits for software development, it needs to seek to resolve legitimate scientific uncertainties. This must be something a competent software professional couldn’t already achieve.

Below are common software R&D examples of projects that can qualify for R&D tax relief:

• Algorithms, artificial intelligence (AI), and machine learning – If your project involves creating a proprietary recommendation engine, training new machine learning models, or developing algorithms that outperform existing solutions, this may qualify. The key is that you’re advancing the field, not just applying off-the-shelf tools
• New data structures and processing methods – Projects involving novel database architectures, real-time analytics engines, or systems capable of handling unstructured or large amounts of data often qualify. HMRC recognises the challenge of overcoming uncertainty in data science and software engineering
• Systems integration beyond standard methods – Linking two or more legacy platforms that were never designed to work together is more than routine development. If new code is required to overcome compatibility issues or performance barriers, this is likely to fall within the definition of R&D
• Cybersecurity innovation – Building a new encryption protocol, fraud detection tool, or dynamic threat monitoring system involves tackling technological uncertainties. Cybersecurity R&D is particularly valuable given the fast-moving threat landscape
• Cloud computing and distributed systems – Creating scalable architectures, container orchestration methods, or novel approaches to serverless computing can also qualify. If your project resolves uncertainty in how distributed systems behave, it counts as R&D
• Blockchain and secure audit trails – Developing blockchain-based systems, tamper-proof audit logs, or decentralised applications may qualify where they resolve technological uncertainties in security, data integrity, or scalability
• Software performance breakthroughs – Projects that improve speed, efficiency, or scalability often qualify – like enabling advanced AR/VR capabilities or advancing fintech

Eligible expenditure for software R&D tax relief

R&D tax relief allows businesses like yours to claim back certain qualifying costs, which can reduce your outgoings in corporation tax, or help you pay your workers. These include both direct expenditure and indirect expenditure.

Direct expenditure you can claim software development R&D tax credits for:

• Staff costs for R&D tax credit software (developers, testers) – Salaries, employer NICs, pensions, and reimbursed expenses for time spent directly on R&D work
• Externally provided workers (subcontractors) – Payments for third-party specialists carrying out R&D activities
• Cloud computing & hosting services – Server costs, virtual environments, and data storage used directly for experimentation, testing, or modelling
• Software licences and specialist tools – Licences and APIs used directly in the coding, modelling, or testing of the R&D solution

Indirect expenditure you can claim software development R&D tax credits for:

• Staff costs (project managers) – Overseeing and managing R&D teams rather than directly carrying out technical work
• Software licences and specialist tools – Tools used for supporting functions such as debugging, project tracking, or general development management
• Cloud computing & hosting services – Proportional costs where infrastructure supports both R&D and non-R&D activities

Claiming R&D tax credits for software – what doesn’t qualify?

Software development which does not create an advancement in the field or aim to resolve scientific/technological uncertainties will not meet criteria for R&D tax credits for software development.

• Routine bug fixing – correcting coding errors in an existing product without uncovering new scientific or technological uncertainty. Eg. patching a software bug that causes a mobile app to crash on iOS 17
• Cosmetic UI/UX changes – improving the visual design, layout, or user journey without advancing technology. Eg. redesigning a website’s navigation menu for smoother user flow
• Standard integrations using published, public APIs – linking systems together where the method is well-documented and requires no novel development. Eg. connecting an e-commerce site to Stripe using its standard API documentation
• Maintenance, updates, and minor feature additions – making small adjustments or upgrades that do not involve resolving technological uncertainty. Eg. releasing a software update to add dark mode or update terms and conditions pop-ups

What are the common misconceptions about software R&D claims?

Some software businesses miss out on vital tax credits because of misconceptions about R&D tax credits for software development:

• Myth: All claims will trigger HMRC audits
  Truth: Not all R&D tax relief claims are audited. HMRC uses a risk-based, AI-driven system to identify unusual or high-risk R&D claims. If your claim is well-prepared and backed by evidence, it is less likely to be flagged
• Myth: Internal-use software isn’t eligible
  Truth: Software developed for your internal purposes, such as workflow automation or data management, can still qualify as R&D if it meets HMRC’s definition. The most important thing is that the work resolves technological uncertainties
• Myth: Using open-source tools disqualifies claims
  Truth: Open-source frameworks or libraries do not automatically make a project ineligible for R&D tax credits. What matters is the novel development you build on top of those tools, particularly if you’re creating something that advances software technology
• Myth: Only new software development qualifies
  Truth: Enhancing or modifying existing software may still qualify for tax credits, if the work involves overcoming new scientific or technological uncertainties, not just routine upgrades

How can my software firm build an R&D tax relief claim, and what’s the process?

When claiming R&D tax credits for software development, building a successful R&D claim requires putting together a strong technical narrative, documenting your records well and ensuring compliance. Once you’ve submitted your claim, you may be subject to an HMRC enquiry before getting your claim outcome.

While preparing your software R&D tax credit claim, it’s important to consider the different activities and costs involved. A Software Engineer or Developer may directly carry out experimental coding, testing, or building prototypes, while Project Managers ensure the work is recorded and documented in line with HMRC requirements. 

Senior leadership, such as the CTO, often provide the technical oversight needed to evidence scientific or technological uncertainty, while the CFO plays a crucial role in validating costs and ensuring financial compliance. Together, these roles form a strong R&D claim.

How do I build a robust technical narrative for my software R&D claim?

You need to reasonably demonstrate to HMRC that you’re advancing the software industry and resolving uncertainty in the field. Reasonably demonstrating this will involve laying out your project and qualifying criteria clearly, and providing evidence where necessary.

What kind of records will HMRC want to see from an R&D claim for software development?

HMRC requires you to detail the projects you’re claiming for, how they meet the basic criteria and how much relief you’re claiming R&D tax credits for software development for. You can also send supporting documents. You may be asked to provide more information in an HMRC enquiry.

Evidence to demonstrate in your claim for R&D tax credits for software development includes:

• Project summaries and technical reports – Clearly describe your objectives, uncertainties, and the advances you achieved during the R&D process
• Evidence of costs: invoices, payroll records – Provide detailed breakdowns of your eligible expenditure linked directly to the R&D project
• Proof of the uncertainty: meeting notes, project plans, or code commit history – Demonstrate the technical challenges you faced and how your team resolved them

How can I avoid HMRC enquiries and delays on my software R&D tax relief?

To avoid HMRC enquiries on your R&D tax credits for software development, make sure you clearly lay out how you’re aiming to make a scientific and technological advancement that meets HMRC guidelines.

• Automatic risk checks – HMRC uses software to spot claims that contain anomalies, like odd wording or spending that doesn’t add up. Keep your explanations clear, straightforward, and fact-based
• Lessons from recent cases – HMRC has successfully challenged claims in the past where businesses couldn’t provide enough evidence or failed to prove there was genuine technological uncertainty. This is why records are essential
• Best practice for smooth claims – Provide accurate project reports, make sure your cost breakdown is reasonable, and avoid exaggerating the scale of your work

The best way to ensure you include all of your qualifying costs while staying compliant is to get help from an R&D expert. Reach out to Alexander Clifford today to see how you could boost your claim.

How does the 2024 merged scheme affect software R&D claims?

Businesses with periods of account beginning on or after 1 April 2024 will now claim R&D tax credits for software development under the merged R&D scheme. The old SME scheme and RDEC scheme have been merged into a single scheme, which runs alongside ERIS (Enhanced R&D Intensive Support). 

There are special new rules for “R&D Intensive” SMEs whose R&D expenditure is at least 30% of their total expenditure.

Can I claim R&D for cloud and data costs?

Costs for datasets and cloud services are now qualifying R&D expenditure for accounting periods beginning on or after 1 April 2023. That includes data storage and processing.

These categories continue under the merged scheme for periods starting on or after 1 April 2024. 

How does the PAYE/NIC cap affect software-heavy firms?

Under the merged scheme and ERIS, any payable credit claimed for R&D tax credits for software development is capped at £20,000 plus 300% of your relevant PAYE and NIC liabilities in the period. 

Companies with low UK payrolls or heavy use of overseas contractors are most exposed to this cap. In the merged scheme, any amount above the cap is carried forward; under ERIS, an excess claim above the cap is invalid. HMRC’s CT600L and manuals explain the step-3 cap calculation.

R&D tax credits for software development – FAQs

 

Does software development qualify for R&D credit?

Yes, software development can qualify if it involves resolving technological uncertainties. Routine coding alone won’t qualify, but creating new algorithms, data architectures, or integrations that push technical boundaries usually does.

Does website development qualify for an R&D for software development?

Yes, if the project involves solving genuine technical problems – for example, developing a new content delivery engine – then it may meet HMRC’s criteria for R&D tax credits for software development. Standard website builds don’t normally qualify, as they use established tools and methods.

Can I claim R&D tax credits for software I built for internal use?

To qualify for R&D tax credits for software development, your software needs to offer a wider benefit to the field, not just your business. For example, building an internal system to handle large datasets could qualify if there were uncertainties about feasibility.

What if my software project failed – can I still claim?

Yes, unsuccessful projects can still qualify. HMRC looks at the attempt to resolve uncertainty, not whether the final product was commercially successful. What matters is the knowledge gained and the systematic approach taken to overcome technical challenges.

Are subcontractors’ costs for software development eligible?

Yes, but the rules on claiming R&D tax credits for software development differ depending on whether the subcontractor is connected or unconnected. Under the merged scheme, 65% of payments to unconnected subcontractors can usually be claimed. Costs with connected parties may also be eligible, but stricter conditions apply.

How do HMRC’s new rules on data and cloud computing affect my R&D claim for software development?

Cloud services and datasets used directly in R&D are now fully eligible for R&D tax credits for software development. This covers server costs, hosting fees, and data processing for experimentation or testing, making it easier to capture the full value of modern software development.

What counts as a “competent professional” in software?

A “competent professional” in software is someone with the relevant skills, qualifications, or experience to assess whether a genuine technological uncertainty exists. HMRC expects R&D claims to be supported by their expertise and professional judgement.

Do agile sprints and iterations count as R&D?

Yes, agile sprints and iterations can qualify for R&D tax credits for software development when they involve experimental work to resolve technological uncertainties like iterative development, rapid prototyping and adaptation to new insights. Routine feature updates or bug fixes, however, won’t count unless they address genuine technical challenges.

How long do HMRC take to process software claims?

HMRC usually processes software R&D claims within around 40 days. However, timelines can be longer if your claim is selected for review or extra information. Providing clear records, strong technical evidence, and a well-prepared claim can help speed up the process and reduce the chance of delays.

Does improving existing software qualify, or only new software?

Improving existing software can qualify for R&D tax credits for software development if it tackles genuine technological challenges. Existing software that advances performance, scalability, security, or functionality may be eligible if you can evidence the uncertainty and how it was resolved.

Can I get R&D credit for SaaS companies?

Yes, SaaS companies can qualify for R&D tax credits for software development if their projects resolve technological uncertainties. Eligible work might include developing new architectures, improving scalability, enhancing security, or building innovative features that push beyond standard industry solutions.

Case study: successful software R&D claim

R&D claims for software development are often successful when all of your eligible costs are accounted for. We helped a client build a successful claim for workplace management software:

A client developed an innovative workspace management system delivering real-time utilisation data via sensors and a custom data-handling environment – addressing technological uncertainty in syncing multi-tenant data efficiently.

Alexander Clifford documented the experimental sensor trials, infrastructure choices, and failures, to prove the R&D narrative. The claim qualified because the project resolved significant uncertainty about real-time user synchronisation within complex, multi-tenant architectures, demonstrating genuine technical advancement beyond routine development.

This enabled a successful HMRC claim, resulting in a cash benefit of £16,277.34. 

How Alexander Clifford can simplify your claim

Submitting your own R&D tax credit scheme can be complex, especially for software projects where the line between routine development and qualifying innovation isn’t always clear. That’s where we come in.

At Alexander Clifford, we’ve processed over 2,400 claims and are proud to be a 5-star rated R&D tax advisor. Our specialist team know exactly how to identify eligible activities, maximise your claim, and ensure full compliance with HMRC requirements.

Get in touch to book your free consultation with an R&D tax credit specialists.