Due to the accelerated rate of change in the IT sector, it can be hard to pinpoint what qualifies for R&D Tax Credits and what doesn't. Find out if you could claim.
Due to the accelerated rate of change in the IT sector, it can be hard to pinpoint what is R&D and what isn’t. Often IT professionals are very technical, whereas R&D lies in the grey area and when a claim is made it’s subject to the opinion of HMRC’s inspectors. This has created misconceptions in the industry around what really can be claimed for. Tax incentives are an important way for the UK government to give the IT industry the platform and funding it deserves so that it can keep up with the surge we’re seeing in the rest of the world.
Where can R&D be found in IT?
Any business employing software developers is likely to be doing some form of R&D. For every 50 businesses we speak to who tell us they’re not eligible, 49 of them are incorrect.
Developing new software and enhancing existing software
The overall process of writing and developing new software contains large amounts of R&D, but it is harder to come up with totally new software ideas. More often than not R&D will occur when problems are identified within existing software or room for improvement is spotted. Many of the common technical uncertainties that are explored include:
- Integration failures
- Data corruption
- Update time outs
- Hung applications
- Memory leaks
- Incorrect calculations creating the wrong answers
The process of developing and enhancing can be split into 4 stages, each stage has areas that contain or are very likely to contain R&D.
Design Stage: Identifying problems in existing software or brainstorming new software ideas. R&D comes from analysis of requirements by the developer and the initial design plan of the software by a systems analyst, putting together a detailed blueprint of the phases that will be required in development.
Development Stage: The logical part, where the plan and process to overcome an uncertainty is put into action. Areas that can be categorised as R&D are the writing of code and algorithms by programmers, as well as the identification of new issues often surrounding optimisation, security, scalability, which are discovered once theory is put into practice.
Testing Stage: Every time you make a review and re-run an algorithm count as an iteration. There are two types of testing that can be claimed for:
A) Component testing (also known as module and program testing) which finds defects in the module and verify which areas of the software is working correctly.
B) Integrated testing, to see if the individual software modules will work properly as a group.
Documentation Stage: In this stage the uncertainties have been overcome and advances have been made. Claimable R&D can still be found in the writing up of the technical advances gained from the other eligible R&D phases.
As monolithic IT systems have now become outdated for business use, we see modern businesses use a large, diverse range of computer systems, devices and software which need to be integrated.
R&D is located in the overcoming of any barriers for merging the different subsystems into one large system, whilst being able to function as required. Value is added through system integration as it adds new functionalities, however adding new functionalities to a system isn’t R&D. R&D is the new code that is written to allow both systems to adapt to each other, getting rid of the problems that they were facing.
Common misconceptions of IT R&D claims
“I can’t claim for the time my developers spent on a client’s project”.
Wrong: a software development company is able to claim for the actual costs they incurred in carrying out the R&D elements of the work, this typically comes under PAYE costs.
“We can claim for everything because this is a new product on the market”
Wrong: Only the areas that show R&D has been undertaken to overcome a barrier can be claimed for. This may include the development of untried and tested code and running iterations to make the improvements.
How can MPA help?
MPA thrives in understanding “the grey area” of R&D. One thing to remember if you are still unsure whether you are eligible for R&D tax credits is if you are having to overcome a problem, how are you doing that? Overcoming the problem is where R&D lies.
Our analysts know where the line is for what does and doesn’t qualify under the R&D Tax Credit scheme - a line that can often be very thin. Don’t risk an enquiry from HMRC by using businesses that don’t have the level of expertise you need. Get in touch to speak to one of our experts and find out if your business has claimable R&D.