Navigating the Research and Development Process
Introduction
As technology becomes a key part of working life, more and more companies find themselves investing in software or application development.
Until recent years, it seemed clear that most companies developing this type of technology could benefit from research and development tax relief.
However, as these processes have become increasingly familiar and application development in general is a more “mundane” activity, it is no longer always easy to determine whether companies involved in software development can make an R&D claim.
It is of course important for businesses to understand this from the outset as the process of developing this application can be time consuming and costly and therefore to the extent that an R&D claim cannot be made it may have an impact on the company’s results. decision to move forward.
This would of course be a shame, because one of the main purposes of the research and development tax system is to encourage innovation, which many new applications and software will surely bring.
That being said, what is the problem then?
Which software developments may be eligible?
Well, first of all. In reality, most software development projects should still be eligible for research and development. Provided that they demonstrate progress within the industry and not just within the company itself.
The company making the claim must be able to provide sufficient evidence to explain how the technological uncertainties were resolved.
Common areas that are often eligible for R&D include the use of artificial intelligence, cloud computing, robotics, data processing, and augmented reality.
In these cases, R&D relief will often apply to companies, whether they are developing a new software product or service or simply improving an existing project or system.
However, it’s not that simple.
The definition of Research and Development
As a reminder, research and development generally takes place when a project “seeks to achieve scientific or technological progress.
However, this can be, and has been, interpreted in different ways.
These are the activities of the company which contribute directly to achieve this scientific or technological progress, through the resolution of scientific or technological uncertainty, which will be eligible for R&D.
And this whether or not the company has succeeded in progressing.
Challenges specific to software development
It can be relatively simple for a company to explain how its own the state of knowledge or capabilities has advanced in the technology space, via their work on a particular project.
However, this may not be a breakthrough in the entire industry itself, which can be very difficult to prove in such a rapidly changing industry.
The main challenge for companies is to explain how their project has advanced the industry itself.
This can be particularly difficult if HMRC officers do not fully understand the intricacies of software development. In this case, it is essential to provide clear evidence to support your case.
The starting point is to determine whether an existing solution is easily deducible by a competent professional in the field.
In other words, could someone with the same experience and qualifications easily achieve the same advancement? Does the company’s solution address technical uncertainties?
It is important to differentiate between “uncertainty” and “complexity”. Although a complex project may require more time, resources and expertise, this does not necessarily mean the outcome was uncertain.
For example, a software project may be very complex, but if the underlying technology to develop that software or technology already exists, the entire project may not be considered R&D.
It is also important to note that some R&D projects qualified in previous years may no longer be qualified if technological capabilities have advanced within the industry. This is where things get tricky, as the industry has clearly progressed in recent years. years – to the point where it can seem like everyone is doing it!
The need to consider the “technological base”
To help HMRC understand the scientific or technological advances that have taken place, it is mandatory to explain the technological basis of the project on the (not so new) additional information form which is submitted as part of the search request and development.
This benchmark should refer to industry standards, not just the company’s internal capabilities. What was the industry standard and how did your project improve on it?
Clear evidence must be provided to show that the project has significantly advanced technology beyond this benchmark.
It is crucial to involve a technically competent professional in considering this matter, as it is their expertise that will be essential to supporting the claim and any challenge from HMRC.
Reminder on research and development subcontractors
It is worth remembering that many companies whose primary business is not software or application development outsource their software development to a software development engineer, often an independent one.
This is OK, and the costs of paying that subcontractor can still be included in the claim provided the claim as a whole qualifies for research and development, but subcontracted costs can only be included in the claim. ‘up to 65%.
Why is all this important when it comes to research and development?
Due to a history of non-compliant and fraudulent claims, HMRC has significantly increased its review of R&D claims, introducing new mandatory requirements to identify and reject illegitimate claims. Therefore, even genuine claims now face a more difficult process.
This is particularly true for software development companies, which we often see as a ‘red flag’ for HMRC for the reasons highlighted above.
Call a professional advisor
Navigating the R&D claims process can be difficult, particularly for those in the software development industry and/or companies that outsource software development, where the risk of litigation is, in our opinion, higher.
We advise businesses considering filing a claim to seek assistance from a qualified tax professional. This ensures that you receive clear advice throughout the process.
Next steps
At ETC Tax, we have the expertise and experience to help your business with its software development research and development efforts. Do not hesitate to contact us today.
