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R&D tax credits for software development companies

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Can software companies be eligible for R&D tax credits

The software industry is perhaps the most innovative of any sector as it never stands still. Software companies are constantly developing new and improving existing software to continue to enhance functionality and user experience. There is a huge amount of risk involved with high overheads – particularly in staffing costs.

What are R&D tax credits?

Research and development (R&D) tax credits are a government incentive designed to reward UK companies for investing in innovation. Recent changes to R&D tax credits have enabled more UK companies to benefit, particularly software developers. Both software and cloud computing costs have now been added to the list of eligible costs that can be claimed on. 

Essentially, R&D tax credits allow up to 33.35% of a company’s R&D expenditure to be recovered, either as a reduction in Corporation Tax or as a cash repayment. This is a golden opportunity for many companies in this sector to take advantage of in order to reinvest in innovation and development.

How to find out if you are eligible for R&D tax credits

To be eligible you need to demonstrate:

  • You have attempted to make an innovation either by improving existing software or creating a new product
  • You have encountered adversity
  • You can show how your advances benefit the sector as a whole, not just your own business
  • The solution you are trying to reach could not be easily worked out by a professional in that field or if someone has worked on this particular project – how they failed and how you tried to overcome this
  • You have faced risk
  • The successes and failures you encountered

Which costs can software companies claim for?

In the software industry, costs can be extremely high with an elevated amount of risk. It’s essential that businesses don’t miss out by not realising the range of costs associated with R&D that can be claimed for. These include:

  • Staffing costs – including NI contributions and pensions
  • Sub-contractor costs – provided they directly pertain to R&D projects
  • Consumables – including computer hardware and lighting and heating costs

How do you claim for R&D tax credits?

If you are a business owner in the software industry and you would like some advice on how to claim for your R&D costs, please don’t hesitate to contact us. We can help you navigate the process to ensure you don’t miss out on potentially huge savings to reinvest in your business.

Jacqui gudgion corporate and business tax partner

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