Many businesses are investing in IT or software development and subsequently could be eligible to claim R&D tax credits. However, we’ve found that many firms aren't clear on which of their projects qualify. Here, we share how to apply HMRC’s software guidelines for R&D.

What are the R&D software guidelines?

HMRC provides detailed guidance to highlight the boundary between routine software coding and eligible R&D. Applying this guidance, however, to actual development projects is complicated.

There has been confusion as to whether software development meets the criteria of an advance in science and technology. The aim of the guidance is for HMRC to highlight where it expects to see the boundary between eligible work and non-qualifying activities within R&D tax credit claims. The key take away is that HMRC is concerned with claims that focus on functions and features of the product rather than what has been developed to achieve this functional capability.

How will this impact your R&D tax credit claims?

The guidelines show the importance of digging into the technical work when reviewing your projects, rather than focusing on the functions and features, so you should be looking at the code generated within your projects while completing your eligibility assessments. Your software specialists will need to understand the R&D eligibility criteria and be involved in your claim preparation process for you to be successful. In our experience, this is where claims fall down for many businesses because of the lack of communication between the finance team and the specialists.

To avoid this error in your claims, our software experts are on hand to help with the translation of the R&D guidelines into the language of your software developers. This is for ease of their introduction to the scheme and to highlight the importance of their involvement in the claiming process. But going forward, the team reviewing the R&D claim at your company will need to be confident in applying these rules. We can help train your developers to review your claim and remain compliant with HMRC’s guidelines, and avoid the risk of an enquiry.

How to apply the guidelines to your software projects

There are case studies included in the guidelines with examples of how to apply the eligibility criteria to your software projects but they are fairly generic with the guidelines translating into an agile project with multiple short-duration sprints.

In terms of the sprints, the same principle applies that you need to review the technical aspects of the work, not the function or feature being developed. In agile development language, each sprint has a story that describes the feature to be created, so reviewing at this level isn’t beneficial to your claim. In addition, each sprint covers a very small part of a bigger project and can contain minimal technical input. We suggest reviewing at a level above these sprints during your eligibility assessment, to ensure you review the broader enhancement being developed - quite often, this next level up is called an EPIC.

What are the guidelines for web development (UI and UX) and software upgrades?

UI and UX development present a range of challenges, from human factor issues around usability and layout, to providing functionality in the form of buttons and menus, and including technically complex image and data compression algorithms to maintain performance. HMRC’s new software guidelines confirm that work focused exclusively on the look and feel of the interface is unlikely to be eligible, while improving the performance capabilities could be eligible.

Get trained now don’t leave it until it’s too late

Many activities within the software sector are described as being development but that does not mean they automatically meet the meaning of R&D for tax purposes. Additionally, it shouldn’t be taken for granted that the commercial software project aligns with the definition of R&D set out in the BEIS Guidelines. As highlighted in the software guidelines, these are two areas where HMRC see mistakes. Unfortunately, the software sector saw high levels of error in HMRC’s revised estimates of fraud and error in the scheme. As such, R&D claims in the software sector will be under scrutiny, and businesses will need to be certain that the work they’ve claimed for fits within the guidelines.

When signing off on an R&D claim, would you be familiar enough with these issues to ensure your claim is not over-stepping the eligibility boundary? We are offering training and support to senior finance staff to provide the skills to critically review an R&D claim, if you would like to find out more please contact us below.