Software projects are often resource-intensive, involving skilled developers creating digital tools that offer new functionality or potential applications. These projects are usually well documented, and often built according to exact specifications. Because they so frequently create new features and functionality, businesses and R&D advisers have long pinned high-value software projects as ideal candidates for R&D tax relief.

In the early days of the scheme, HMRC tended not to challenge software projects very often. This gave rise to an increasing number of software claims that contained a degree of technical uncertainty, but it was hard to define exactly where technology had been advanced. To better understand the qualifying nature of projects, HMRC began to enrol the internal support of its Chief Digital Information Office (CDIO) to advise its inspectors on the technological landscape of software development. In 2016, HMRC published CIRD 81960 and CIRD 81980, detailing how the BIS Guidelines should be applied to the field of software development.

Software and BIS Guidelines

HMRC consider software development activities to qualify under the Scheme in two scenarios.

  • Software that has been developed is used solely as a tool for use in another R&D project. An example of this would be the development of a software tool to screen for potential chemical structures to treat cancer
  • Software that is the end goal of an R&D project, with the advance pursued specifically in the field of software or information technology.

In the first scenario, the technological advance would be in the field of chemical science or bioscience, and the software tool would represent an integral part of the research. The second scenario is a bit less cut and dry. It’s hard to separate an advance in software from functionality that’s build using standard tech.

To do so, businesses and advisers must consider the proper boundaries of the R&D project and the underlying technology involved in building the software. Have existing technologies, tools, and methods been used in the standard way to create a bespoke solution, or has the underlying technology been significantly adapted or improved as current solutions and methods were shown to fail? The software may well provide new or bespoke functionality, but is what’s under the hood new and more performant than technology that already existed?

How do you tell if a software project is eligible?

This question requires careful consideration. Over the last 12 months, HMRC has implemented additional checks to assess whether R&D claims are valid. This means companies must have a much more focused view of R&D activities. They will also need to provide evidence showing how the underlying software components have been altered beyond existing capability.

Another key element in their questioning is why these solutions were not just routine development using current knowledge and capabilities. Consider the following points when constructing a software-based R&D tax relief claim:

  • What coding solutions and tools were out there at the start of the project? Why weren’t those sufficient?
  • What new solutions or approaches needed to be devised to achieve the specific technological capability that was required?
  • What parts of the software development project be achieved using standard tools and methods? Which parts could not – and why?

Software projects can definitely be great candidates for claims, they just require a bit more attention now than previously. HMRC have brushed up on their IT skills, and they’re more willing and able to find fault with software claims than before. Working closely with your client and their team to ensure that they understand the eligibility criteria makes it much easier to identify qualifying activities in software.

The R&D Community offers training and support to help you feel confident in assessing the strengths of your clients’ claims for R&D Tax Relief. While we can’t guarantee that HMRC won’t open an enquiry into one of your claims, we can help you avoid the pitfalls that commonly, and quickly, lead to claim rejection. As part of our comprehensive course catalogue, we have two whole modules dedicated to software claims. The first video of each course is also available for free, so you can try out our training before you sign up.