October 2018 saw the introduction of updated criteria governing the eligibility of software development projects for R&D Tax Credits and R&D Tax Relief, but HMRC didn’t widely publicise the updates, meaning many advisers and software developers themselves are unlikely to know about them. Ian Batkin sheds light on the changes.
The number of R&D Tax Credit claims made by organisations operating in the specialist area of software development has risen significantly in recent years. This growth led to the HMRC CDIO team carrying out enquiries into a number of software claims, following which, HMRC issued new guidance on the application of the R&D Tax Credit Guidelines (a.k.a. the BEIS guidelines) to software development projects.
Whilst the majority of these investigations initially focused on large companies, it is likely that HMRC inspectors will soon throw the net wider, so we won’t have to wait too long before SMEs are also put under the HMRC microscope in this respect.
It’s important to understand that the BEIS guidelines remain the same and still apply to all fields of Science and Technology. Also be aware that the revised guidance compliments these to add clarity for Software Development projects, according to HMRC.
Purpose of the updated guidance
The additional guidance applies to software projects and clarifies the concepts of Scientific or Technological Advances, Scientific or Technological Uncertainties and Project boundaries.
It is intended to link common software development scenarios to specific paragraphs within the BEIS guidances. HMRC has emphasised that software R&D has equal applicability as other forms of Research and Development. Software Development projects that qualify as R&D can either occur in their own right or as part of broader R&D Tax Projects.
What’s in the updated guidance?
The key points of HMRC’s updated guidance on R&D Tax claims for software development projects can be summarised as:
• Research and development projects that were previously considered to meet the BIS Guidelines definition, may not now qualify because ‘technological capability has increased over time’
• HMRC caseworkers will have support from HMRC’s own computer specialists in relation to assessing eligibility of R&D claimed
• R&D Tax claims now need to better explain and articulate both the advance sought, and technological uncertainties faced, and what prevented these from being readily deduced. For this ‘better explanation’ there are three key concepts that must be carefully considered:
1. Advance sought in overall knowledge and capability: this means companies must be more specific and detailed in explaining these and demonstrating that the outcomes are beyond existing capabilities (and that these couldn’t be readily / easily deduced)
2. Overcoming technological uncertainties: need to explain what made it uncertain, why it wasn’t readily deducible, and why an alternative approach was attempted (and not just that it was)
3. Clarifying project boundaries, including identifying parts that qualify and parts that don’t: expenditure on requirement gathering per se should be excluded, as should testing that does not contribute to resolving uncertainties. It’s important to note that the purpose of testing needs to be clarified and work on the look and feel of a solution which don’t really contribute to the R&D should also be excluded.
What if there is an enquiry?
Possibly the most significant change here relates to disputes. If a dispute arises, the competent professionals must be able to fully explain the baseline of knowledge and capability available in the public domain (at that precise point in time) and answer any associated questions from HMRC.
Luvo’s R&D Tax claims specialists are fully abreast of the criteria for all claims, especially those relating to software development projects and the impact of this newest guidance and criteria. We will continue to consider and apply this carefully and ensure that any and all future claims that we support should appropriately reflect what HMRC is now looking for.
Luvo works predominantly for innovative, small and medium sized businesses in a wide variety of industry and market sectors, and also delivers specialist R&D Tax, Patent Box and Capital Allowances advice and claims support to numerous independent accountancy firms and practices. West Midlands-based but nationally active, the firm works on a contingent basis and nothing is charged for any initial discussions or support until an engagement is fully agreed. The firm’s team has achieved a 100% success record in making claims for its clients.