When looking at what qualifies for research and development (R&D) tax credits, HMRC is looking to see evidence of an advancement in overall knowledge or capability for the whole field of computer science.
Software companies that overcome scientific or technological challenges must do so using a competent professional in the sector, with knowledge and results being presented in a technical narrative detailing what problem was faced, and how it was overcome.
Equally important is the improvement of an existing product or system. This doesn’t mean simply adapting software to your business, although HMRC would consider improvements that lead to better integration of systems with web programs, hardware, new devices and so on.
So what innovations could qualify for R&D tax credits?
Artificial Intelligence (AI)
Over the last decade, the number of companies using AI has grown significantly, and the trend only seems to be increasing with more and more products and services using the technology in order to enhance companies’ propositions.
The strict definition of AI is that of making computers resolve complex situations by using statistical techniques to calculate probabilities, thus allowing software to make decisions for us. It requires having access to all the data relevant to a particular task.
As businesses become more digitised, AI (and machine learning technologies) will fast become the biggest strength for software companies. The application of AI and its associated technologies can include:
Natural language processing
Have you ever spoken to a call centre and thought the person you were speaking to came across as a little robotic? As though it was an automated agent taking you through a set list of qualifying questions before passing you onto a relevant person?
Natural language process can also be used in legal services to review archived documents and find certain cases. It can be found in recruitment when vetting candidates or scheduling appointments. During political campaigns, the technology will be used to gauge sentiment on particular issues and respond with targeted automated messaging.
Artificial intelligence is used as part of satellite technology to scan countless amounts of data looking into deep space to find such things as signs of alien life or clues about dark matter.
Closer to home, AI helps in healthcare by analysing detailed medical images to detect early signs of disease.
Financial industries rely on immense quantities of data, with decisions having to be taken in split seconds. This can be done fastest using AI.
Equally important is the ability to detect problems in company or industry data; being able to identify data breaches, for example, means AI is a highly valuable security tool.
A lot of R&D work in software focuses on structuring data in an accessible manner using new search processes and finding new techniques to find information. The wider applications are clear for industries such as eCommerce where accurate product retrieval from search queries is key to success.
This software relies on remote servers which are often run by third-party providers and processes data available through the web. R&D plays a big part in streamlining how cloud services combine software and hardware, how code operates in a cloud provider’s environment, and how companies can scale more rapidly.
What specific costs can be claimed?
Once you know what sector your company will be developing software for, it’ll be time to consider the specific costs that HMRC will allow you to claim for. These include:
This will include gross salaries, employer NI contributions, employer pension contribution and certain business expenses. You cannot include any benefits such as private medical cover, company cars or director dividends.
Two schemes cover R&D work carried out by subcontractors: the Research and Development Expenditure Credit (RDEC) scheme and the SME R&D tax credit scheme.
With an RDEC claim, these costs wouldn’t normally qualify for tax relief unless the subcontractor is an individual, a partnership or a qualifying body such as a charity, university or scientific research organisation.
With the SME R&D tax credit scheme, you can claim for the expenditure on subcontractors involved in the project. Complexities arise around whether subcontractors are considered ‘connected’ or ‘unconnected’ - this depends on the nature of their expenditure and we recommend speaking to an expert to determine what HMRC considers claimable.
Externally Provided Workers (EPWs)
EPWs are people provided to you and who operate through a staff provider such as agencies, contractors or freelancers. As long as you direct their work, the activity can be claimed as an R&D expense. Special rules apply as with subcontractors over whether an EPW is ‘connected’ or ‘unconnected’, which could affect the amount of money you can claim.
We understand this is a complex area, but it’s full of opportunity. We’re experts in identifying costs that companies, particularly those working on software and technology, can claim. If you would like advice on what you could claim, don’t hesitate to contact us.