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R&D Tax Credits for Software Development

4 July 2024

R&D Tax Credits for software development benefits of R&D tax credits saas industry - Alexander Clifford

Explore the benefits of R&D tax credits in the software development industry, and how you can maximise your successful claim with an R&D tax credit specialist.

There’s no denying that software companies have a deep rooted history with research and development. With the ability to return a percentage of the investment made into the modernisation of software, R&D tax credits relieve the financial burden of the software development industry. So what does that mean for your software company? 

Well in this article we’re going to take a deep dive into the world of R&D tax credits in the software industry – who is eligible, how you can maximise your R&D claim, and how you can go about filing a successful claim through HMRC

R&D and Software Development

It’s right there in the name – development. The software development industry is one of the few sectors that continually relies on research and development in order to grow.

At its core, the industry seeks to push the boundaries of its capabilities through innovative progress, making the R&D tax credit incentive one of the greatest assets to UK software businesses. 

With this initiative, your software company is given the opportunity to position itself as a competitor on a global scale – so let’s see how you can benefit from R&D tax credits.

R&D Tax Credits Explained

By offering a tax refund on qualifying research and development expenses, R&D tax credits promote innovation by reducing the financial risks often connected with such progression. 

As a government backed incentive, your research and development project(s) must align with HMRC’s definition of R&D, which is to say that your activities should aim to scientifically or technologically advance your industry.

Software as a Service and Research and Development Benefits

SaaS (Software as a Service) is a dynamic sector with continual innovation, often eligible for R&D tax credits. These credits can be a valuable resource for SaaS companies, assisting in financing their pioneering projects.

SaaS applications frequently involve problem-solving, overcoming technological uncertainties, and developing new or enhanced software products, all of which are essential for R&D tax relief claims.

With careful planning, SaaS companies can drive growth while benefiting from significant tax savings – but they need to meet the eligibility criteria first.

Eligibility for Software Development Companies and SaaS

Having a good grasp of eligibility requirements can significantly boost your ability to make the most of R&D tax credits. From the expenses to the scheme that you qualify for, every bit of knowledge you can collect on your eligibility may just be crucial.

Defining Eligibility Criteria

In retrospect, the HMRC has a very broad scope for who qualifies for this incentive. The following are the R&D tax credit eligibility requirements:

  1. Your company must be liable to pay corporation tax 
  2. The project(s) must be related to your company’s trade
  3. The project(s) must aim to develop a new process, product or service – or seek to improve/enhance an existing one
  4. The project(s) must seek to solve a scientific or technical uncertainty

Qualifying Costs

The HMRC gives a pretty generous list of qualifying expenditures. The following is a list of qualifying R&D tax credit expenditures for software companies:

  • R&D staff costs
  • Externally provided R&D staff
  • Subcontracted R&D
  • Consumable items
  • Software used in R&D
  • Collaborative R&D work
  • Prototype design, construction or production (dependant on intention for prototype)

Maximising R&D Tax Credits Benefits

To fully maximise R&D tax credits, software companies across the UK need to implement strategic approaches to identify and document eligible R&D activities. As R&D tax specialists, we recommend you organise the following documentation: 

  1. Project descriptions
  2. Technical reports
  3. Financial documents
  4. Supporting documentation
  5. Tax computations

If you are looking to solidify your claim, HMRC actually recommends that you work with an R&D tax credit specialist in order to ensure that your claim is valid and compliant. 

Misconceptions About R&D Tax Credits

Considering this incentive may seem too good to be true, there are a wide range of myths surrounding the prospect of R&D tax credits. These myths and misconceptions are rife throughout every professional sector – software development included!

So let’s dispel the misinformation so that you can go ahead with your R&D claim with nothing but the facts.

Common R&D Tax Credit Misconceptions

As there are a wide range of misconceptions about R&D, it would take a long time to list them all off – let alone dispel them all! So we pinpointed three of the most common misconceptions, in order to help you gain a little more clarity. 

Only scientists qualify

Research and development isn’t just for the people in lab coats. Considering technological advancement is the latter half of HMRC’s definition of R&D, it stands to reason that any technology based R&D project may benefit from the incentive.

Business is too small to claim

The R&D tax credits incentive was initially introduced specifically for SMEs (small and medium-sized enterprises), and it has continued to offer increasing support for smaller businesses over the consequent years.

Claims always result in an audit

While there are a fraction of claims that result in an audit, this is incredibly rare. If you have compiled the correct documentation with accurate information, your claim is more than likely to be successful without the need for an audit.

Avoiding Typical Errors

Taxes can seem complicated in and of themselves, so errors are a frequent occurrence when it comes to making an R&D tax credit claim. The following are the most common mistakes made during the R&D tax credit claims process:

  • Failure to identify all eligible R&D activities
  • Failure to maintain accurate financial records
  • Failure to maintain detailed project records
  • Misunderstanding sub-contracted and externally provided workers
  • Forgetting to notify HMRC of your claim
  • Inaccurately calculating your R&D expenditures

These mistakes can have a huge impact on the outcome of your claim. While some of them could lead to a failed claim, others could lead to further investigation or even legal action. So here are three points that detail how you avoid making R&D tax credit mistakes, ensuring that your claim is ready for success: 

  1. Keep detailed records of everything surrounding your project(s)
  2. Stay up to date with the definitions of eligibility and expenditure
  3. Work with a specialist to compile your claim

Case Studies: Successful Claims

There are many inspiring success stories of companies that have effectively leveraged R&D tax credits for their innovative software development projects, but we want to focus on one of our own – a client that developed workspace management software that helped to analyse workplace utilisation in the post-pandemic workplace. 

With employers facing recruitment, retention and employee well-being challenges now tied to office environments, our client saw a space in the market to develop an innovative product that allows users to see – in real time – how their office space is being used. This allowed companies to utilise their space, in many cases seeing an ROI based on the fact that employers were able to downsize their workspace. 

Considering this kind of technology had never before existed, and that there was a clear market for it, this client met the eligibility criteria that allowed for us to make a claim on their behalf. By collaborating with Alexander Clifford, they were able to receive a sum of £16,277.34 as direct result of a successful R&D tax credits claim.

Future of SaaS R&D Tax Credits

With increasing interests in AI, machine learning and big data, the future of R&D tax credits for software companies across the UK promises to be both exciting and complex. With the continuous evolution of technology, the scope for SaaS research and development is rapidly expanding, which may translate into greater opportunities for tax credit claims.

The future of SaaS R&D tax credits is incredibly bright, but handling it will require vigilance and adaptability – meaning it’s more important than ever to keep up with the latest interpretations of what qualifies as R&D.

Preparing for Future Legislation Changes

As we prepare for potential changes in the R&D tax credit legislation, it’s important to be proactive and well prepared so that you may navigate any impact on your ongoing research and development projects. These four steps can help you to prepare for R&D tax credit legislation changes:

  1. Review all of your R&D activities
  2. Keep thorough documents of projects and their finances
  3. Stay informed of HMRC updates
  4. Seek expert R&D guidance

Not only will these steps enable you to keep ahead of potential legislative changes, but they will also help to solidify your case for R&D tax credits. 

In conclusion, the benefits of R&D tax reliefs have a huge impact on the future of SaaS, simply due to the fact that they allow software companies to further invest in innovative projects. Though navigating the landscape of making a claim can be intricate, preparedness and trust in a reliable R&D tax specialist will ensure that your claim adheres to the stringent HMRC requirements.

And that’s where we come in. Having processed over 2,400 claims that resulted in a solid five-star rating, Alexander Clifford truly is your trusted choice for R&D tax credits. Get started on your claim today by leaving your details in the contact form below. 

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