Software research and development (R&D) claims are on the rise, but are HMRC’s expectations on the rise too?
11 October 2017
Blog by Rachel Moore
Research and development (R&D) tax credits offer a significant cash benefit that can help companies fund investment in R&D. Innovative software and technology is becoming increasingly fundamental to a number of industries – many of which where R&D is not usually thought to be relevant, such as financial services and retail. As a result, there is an increasing number of R&D software claims made by both software firms and those industry players that build proprietary systems.
HMRC’s evolving approach to software R&D claims
As a result of the surge in software related R&D claims, HMRC have changed their approach to reviewing R&D claims. They now use their own software specialists from HMRC’s Chief Technology Office (CTO) to help assess a large number of software claims. In the recent HMRC R&D consultative committee meeting, HMRC discussed its approach to reviewing software R&D claims. In particular, there was discussion on what information HMRC and the CTO team expect to see to provide comfort that the activities are eligible and it is clear that accurate technical supporting documentation is key in this.
Top tips for software R&D supporting documentation
Based on the information gathered from these discussions and our hands on experience of CTO questioning, we have pulled together some top tips for software R&D claims to ensure the supporting documentation helps minimises any delays in the processing and approval of claims:
- Provide succinct and short descriptions. Long, lengthy and convoluted descriptions can be unhelpful. It’s important to keep the project descriptions succinct, clear and technologically focused. The advantage of this is that it should also minimise the time of company’s technical teams in preparing documentation.
- Stick to the technology and know your jargon. Commercial and business perspectives can pave the way to provide useful information about your company's overarching goal but they don’t explain the R&D activities – they only explain ‘why’ activities are being undertaken. It’s best to keep descriptions focussed on the technology. Also, be careful with the use of jargon in trying to evidence R&D – just because you use an ‘agile’ approach or undertake ‘bespoke’ development, it does not prove there is R&D.
- Do your homework. Companies need to show that they have extended technical capabilities so it’s vital for companies to show that they have assessed the market to provide evidence that there are no pre-existing solutions. This is especially important given that in this day and age, open source libraries and platforms have been well received and extended by the developer communities.
- Avoid generic and overly simplistic anecdotal examples. It’s key to identify the nuggets of R&D within projects, by being able to show the technological uncertainties associated with the specific innovative components of that project. The supporting documentation must provide specific and unique examples that can clearly articulate the project’s technological advances.
- Derive the advances* from the uncertainties. Our own experienced R&D software specialists recommend beginning the description write-up with the technological challenges where the advance may be harder to articulate. A crisp explanation of the various bottlenecks sheds much needed clarity on the complexity of the project and its inherent uncertainties. Through the explanation of how these challenges were resolved, it is possible to draw a more succinct and clear correlation between the underlying uncertainties and the resulting advance.
- Know what doesn’t qualify. It is important to identify and present the non-qualifying activities to HMRC as this clearly provides evidence over the robust technical scoping exercise that preceded it. It also further reiterates your team's ability to know where exactly to draw the line on what constitutes R&D based on their technical knowledge of the subject.
Need more help or information?
From our experience of the CTO team and their increasing expectations on what they want to see in supporting documentation, our specialist software R&D teams have developed a range of tools and templates to ensure our client’s software claims meet the standards expected by HMRC and their CDIO team. If you would like to discuss your software R&D claim in more detail please contact me or one of our R&D software specialists:
- For the purposes of obtaining R&D reliefs, qualifying R&D is defined as taking place where a project is being undertaken to seek an advance in science or technology through the resolution of scientific or technological uncertainty.