Software development firms should cash in on R&D tax credits


New research shows that more than 90% of tech firms have developed new products, services or business processes in the last two years, meaning that they could be eligible for valuable R&D tax credits.

Software developers work in a sector which rests upon constant innovation. For developers, the clue is in the name. Tasked with developing new functions, systems and solutions, virtually everything they do could be classed as research and development (R&D) according to HMRC’s definition.

Yet two fifths of these same potentially eligible firms have never made an R&D tax credit claim meaning they are missing out on tens, even hundreds, of thousands of pounds each year that could be reinvested in their businesses.

The average value of a single R&D tax relief claim among software developers is a massive £56,000, which would make a huge difference to most companies’ annual revenue. Reinvested in the company, this money could fuel further growth and innovation.

Many developers, like other tech businesses, are failing to claim because many do not realise they are eligible for this form of tax relief. People across all sectors still think R&D applies only to scientists in white coats and simply do not associate it with their own work, however ground-breaking or inventive.

In reality, R&D tax relief was deliberately designed to reward and encourage innovation across dozens of sectors. HMRC defines R&D as work which seeks to resolve a ‘scientific or technological uncertainty’. This can take the form of a new process, product or service, or simply be an improvement to an existing one. The R&D work does not even have to be successful to qualify.

Some of the things that developers have successfully claimed R&D tax credits for in the past include:

  • creating tools to extend functionality of software apps or operating systems
  • developing new data management techniques
  • designing innovative new methods of capturing, transmitting, manipulating and protecting data
  • building new software development tools, such as image processing tools
  • creating entirely new software for new projects.

The highest tax relief claim we’ve overseen in this space was worth £112,000 for a multi-channel platform provider based in London which specialised in rewards and benefits programmes. The R&D tax relief was claimed for work the company did developing a bespoke platform for managing social media content.

Even where developers know they do legitimate R&D work, many do not know how to go about claiming the tax relief.

This is understandable as the process of claiming R&D tax credits is complicated. The claim is made up of a calculation of qualifying costs, such as staff time and materials used in the course of the R&D and there are strict rules about what does and does not qualify. This is why most companies call in professional help.

This brings us neatly on to the third reason so many developers do not claim R&D tax relief – due to fears it will be too expensive and time consuming.

With most reputable tax advisors willing to work on a contingent fee basis, developers do not need to worry about upfront costs. With most claims bringing in tens of thousands of pounds, it is worth doing.

We found that tech companies had spent an average of £194,942 on their innovations in the past two years. This is a major investment so these same companies should start taking a proper look at their tax relief entitlements and make sure they are reaping the full rewards of their innovations.

A widespread lack of knowledge about R&D tax credits, who can claim, how and what they are worth is preventing this. For software development firms keen to boost their bottom line and fuel further growth, this needs to change.

Mark Tighe is CEO of specialist tax consultancy, Catax