Software development and R&D

Emma Clewes, Director, Corporate tax

Software forms an integral and largely unavoidable part of our modern lives. The onset of the COVID-19 pandemic has provided a stimulus for society to lean more heavily on our current technological capabilities both socially and in the workplace. It is inevitable that companies will seize the opportunity to develop their technological capabilities, processes and products and with this, the underlying software.

The development and/or use of software can qualify for R&D tax relief and can be forgotten when focusing on a specific end product as the focus of an R&D claim. When considering whether time spent developing software can be included in a claim for R&D tax relief it is useful to consider whether the time spent would be treated as direct qualifying activity or indirect qualifying activity.

Direct or indirect?

Direct qualifying R&D activities relate to the development of the software itself, usually for sale or licencing and indirect qualifying R&D activities relate to the development and use of software throughout the R&D project where the development of the software itself is not R&D.

For example, a project may require a software solution to operate, test and record data to understand if a product is performing better, worse or not at all.

If the company needed to write and code its own software because nothing suitable was readily available then this may be an R&D project in its own right and the time spent on it may be direct qualifying R&D activity. The company would likely start with a baseline knowledge and have to overcome a number of technological uncertainties to produce the software required.

If software was readily available or developing to meet the company’s needs was possible using readily available information, the time spent on this software, along with recording and analysing the data, may be an indirect qualifying activity.

Either way, there may be an argument that time spent in relation to software could be included in the company’s claim for R&D relief. HMRC will want to understand what advance in technology has been made and careful consideration of the part the software plays and the development undertaken is important. If you believe you have spent time developing or integrating software consider the following questions.

  • From what base line has the software been developed?
  • Was software readily available to use for the purposes of R&D activities that could be adapted easily by a competent professional?
  • What uncertainties or limitations were faced in developing the software and how were these overcome?

If you are expanding your software and IT capabilities in response to COVID-19 and wish to explore whether your company would qualify for R&D tax relief, please contact us.

Contact us

Stuart Weekes
Stuart Weekes
Partner, Corporate Tax
Thames Valley