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What R&D software expenses can businesses claim?

Updated: Oct 17, 2023

Almost every R&D Tax Relief claim that we process includes some form of software costs. But it’s hardly surprising, as every business today has software costs. We use software in just about every business process we do! It’s also the one R&D cost that most businesses will know of, when they come to make their R&D claim.


But what you might not know, is that there is one big grey area, meaning certain software costs cannot be claimed.


Let’s find out the fundamental rules when it comes to software costs, and what exactly this mysterious grey area is.

SOFTWARE COSTS: THE FUNDAMENTAL RULES

The rules around software costs would appear to be straightforward:

  • If software has been purchased only to be used in an R&D project, then 100% of the cost can be included in the R&D tax claim.

  • If the software is to be used for other business activities that sit outside of the R&D project, then an appropriate proportion of the software cost needs to be calculated, to be included in the claim.

Simples, right?



SOFTWARE COSTS: THE GREY AREA

However, with software, there are often ‘other costs’, that are incurred alongside the software when it is leased from external parties. It’s these costs where the grey areas start to creep in and can cause a whole host of issues for companies claiming R&D. These costs fall under the banner of ‘cloud computing’ and charges could be for a whole range of activities, including use of software, storage rental, and support.

CLOUD COMPUTING & HOSTING

Cloud computing and hosting is particularly relevant for businesses that are involved in R&D projects related to the development of software. It’s these ‘cloud computing’ costs that unfortunately do not meet the requirements of any of the qualifying criteria to make an R&D claim. It’s quite common for businesses to purchase packages which are used to support activity across their business operations as well as R&D activity. Therefore, it’s key to track the costs dedicated specifically to hosting the testing and development environment, when using the services.


The likelihood is most companies will be using software somewhere in their business, and it could impact their R&D claim. Like a lot of R&D categories, software has its grey areas, but that’s what we are here for, we work with our accountant partners to ensure their clients submit an accurate R&D claim.


As we speak new changes are on the horizon from April 2023 to include all cloud costs associated with R&D, but stick with us and we’ll make sure you’re up-to-date as the changes come in.


Radish Tax, Your R&D Tax Relief Service

For DTX’ers with a potential R&D Tax Relief client you’d like to discuss please book a scoping call here.

Radish Tax by Diagnostax is a specialist R&D Tax Relief provider. Find out more about Radish Tax by Diagnostax.

Please note, as this blog was published prior to 1st April 2023, there is no reference to the changes which have been brought into place for the R&D tax relief schemes.


For expenditure on or after the 1st of April 2023, the following changes in rates of relief apply:


SME – the Enhanced Expenditure uplift rate has fallen from 130% to 86%; and the tax credit rate has fallen from 14.5% to 10% (exc. R&D intensive loss-making SMEs).

RDEC – the credit rate has increased from 13% to 20%.


Further, data and cloud computing costs can now be included within the claim qualifying expenditure calculation. Pure mathematics now falls within the scope of the relief.


For submissions on or after the 8th of August 2023, it is now required for an Additional Information Form to be submitted prior to submission of the R&D claim. For reference, please see our blog here.

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