R&D Claims in Software Development
Software development does not always need to be the principle activity of the company. As such, we see software claims made in industries that include, for example, food, motorsport, and even the alcoholic drinks manufacturing.
As an example, recent claims we have worked on include:
- Games Development
- Financial Services
- Engineering systems
- Risk Systems
- Data modeling
- Simulation environments
- Software driving machinery for manufacturing
- Online marketing systems
- E-Commerce systems
- iPhone/iPad applications development
- ERP Systems
- Warehouse logistics systems
- E-learning systems
- Event management systems.
People are often confused and look for software development that is only “new” or “unique” – this is NOT a requirement.
Software programmers not in the UK?
Furthermore, in the SME market – the development activities do not need to have occurred in the UK. Instead, if the costs have been incurred by a UK entity, there is a strong possibility that you may have a viable R&D claim to be made. This point cannot be understated, as accountants and other financial advisors often over look this point.
What are the characteristics of qualifying activities?
In most cases in software development claims, the qualifying activities do not involve the creation of a completely new software system that has been developed from first principles. Instead, it invariably involves taking an ‘off-the-shelf’ product, being the closest match to their requirements, developing this further and integrating the result into a wider systems architecture. It can involve adapting or improving a system to operate in a completely different or new way.
It is often the case that aging legacy platforms cannot be simply ‘turned-off’. Companies are forced to integrate these systems with the latest development, often where no standard integration protocols exist. Furthermore, there can be issues with data management; data from the legacy systems often needs to be used with new systems, where they were originally incompatible. The development of tools and techniques to overcome these issues would also qualify for R&D tax purposes.
The definition of R&D for tax purposes is that you have an objective that essentially was not straight forward to achieve. The caveat in the guidelines states:
“Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field.”
The following is a list of some activities that could potentially involve qualifying R&D activities:
- integration of telephony and voice technologies
- smartcard interfacing with other devices
- integration of legacy systems
- developing a unified platform containing non-standardised systems
- integration of mobile technologies such as pen-pad or mobile phones.
The primary criterion used to determine if an activity or a project qualifies as R&D is the presence of scientific or technological uncertainty and risk. Other test criteria can include whether the required knowledge was available in the public domain or readily deducible by IT professionals at the time of the development.
Here are some genuine examples of R&D claims made for software development:
“We were developing a new software platform in an attempt to overcome the constraints of a previously fragmented technology landscape. The legacy software architecture contained numerous systems that were failing to meet the increased business demands.
Part of our development involved taking an off-the-shelf database application that was capable of amalgamating the new and legacy datasets into a unified data warehouse. However, the problem was that the sheer volume of data involved, with real-time on-line data availability, over a distributed software platform, meant that the standard off-the-shelf software was not able to meet our technical requirements.
This created the need to develop an additional multi-phase commit and record lock synchronisation function to support the existing off-the-shelf technology.”
The company was a large retailer, trying to overcome the constraints of their legacy asset management systems. Their solution was to attempt to retain key areas of the legacy software architecture whilst integrating with new system enhancements.
The technological uncertainty was their development of an off the shelf technology beyond previously established technical limits in order to meet the opposing demands for database integrity and speed. Whilst a limited number of integrated software components were standardised, other key integrated software functions were unique in-house developments. The outcome meant that the company made technological advances that were not available or readily deducible in the public domain.
Sports Betting Online Service Provider:
“Our current software systems processed numerous online transactions in real-time. The system architecture was already performing close to its limit, and user volumes were still growing fast. The only comparable implementations at this scale had been with a competitor, though we required a significantly greater level of interactivity with our data, with increased scales and availability. Our systems needed to be available 24 hours a day and 365 days a year, where the competitor system only operated during office trading hours.
It was uncertain how to proceed in order to overcome the technical challenges, and an earlier attempt to develop a solution failed to be reliable enough to deploy in the live system. Development activities are currently on-going.”
At its simplest, the system could have increased capacity by continuing to add additional hardware resources to it; but this is not only expensive but also very inefficient.
Instead, the company was attempting to overcome these technological uncertainties by developing a bespoke software engine capable of supporting dynamic data content structures with real-time update capabilities over significantly increased scales. The development team were already attempting to develop their bespoke software engine far beyond any previously established technical boundaries, and the advances far exceeded comparable competitors performance.
Development that is aborted due to the technological challenge or uncertainty often demonstrates a robust case of R&D for tax purposes.
R&D activities do not need to have concluded or yielded a result to be qualifying.