03 September 2021

Claiming R&D tax credits in the software industry

Written By Kene Partners

Claiming R&D tax credits in the software industry

Software development has fuelled the increasing capability of technology. In all its applications in the last year we’ve seen reliance on software in both the home and the office continue to grow. The IT and software sector has allowed millions across the UK to continue their work or education from home, and we recognise our dependence on this sector now more than ever.

The software sector depends on the continued development of new systems or processes to suit specific consumer needs. As more aspects of our lives become digitalised, the potential and opportunity in the software industry will doubtlessly grow. The implementation of new applications in many aspects of our daily life is likely to continue, and new data processing tools such as AI and Machine learning will continue to be adopted in many sectors. This provides a huge opportunity for R&D in the software sector, and some specific examples are listed below.


AI/Machine learning
Management and collection of data has become a huge part of many businesses in recent decades, and AI has facilitated progress in this field. Development to improve AI and build AI systems to solve specific problems is a clear trend within the software sector. Furthermore, machine learning shows huge potential in multiple different sectors and will provide further opportunities for software development

Cloud-Based Technologies
As many individuals and businesses move to more cloud-based storage, software developments will need to keep up to meet consumer needs. Further innovation may also lead to new capabilities of cloud-based technologies and handle more data.

Providing security for users has always been a large part of software development, and with people growing more concerned with their personal data, the need to build more advanced security measures will continue to push the software sector. Development into new encryption techniques or secure communication methods to meet clients’ needs will continue to be a major area in the software sector open to new R&D.

Software technologies are ubiquitous in our day-to-day activities: at home, at school, at work, on a vacation etc. The current IT developments cover different technical sub-areas, such as:

  • AI/Machine Learning
  • Cloud-based systems
  • Data processing and Hosting
  • IOT/IOE (Internet of Things / Internet of Everything)
  • AR (Augmented Reality)
  • SaaS (Software as a service)

Software developers and specialists all over the UK continue to invest their resources into developing and improving IT solutions, creating the most innovative, economically viable services, products, and methods to ease our life. It’s not uncommon for us to work with companies who have previously under-claimed for their software development work. Failure to identify all of the qualifying R&D activities in a software development project can mean that companies lose the opportunity to further fund these valuable projects and grow their business.


Typically, companies that fall under the following are likely to qualify for R&D tax credits:

  • Any company that is developing a software technology
  • Companies that have software experts that provide their services externally
  • Companies that develop and upgrade Software as a Service (SaaS), business tools or enterprise resource planning (ERP) systems
  • Businesses, other than software/IT companies, that perform custom software development in-house

Any development work where your personnel face considerable technological challenges, where the solution is not publicly available or not readily deducible from the outset, has the potential to qualify for the R&D incentives. It is significant to note that the development of software should be the goal of the R&D project. Sample qualifying activities include:

  • Development of new technologies, solutions, architectures, bespoke integration designs, protocols
  • Making noticeable improvements to existing systems. Improvements might be in the areas of performance, scalability, availability, and security
  • Redesigning existing systems using fundamentally different technologies

Particular attention in the legislation is paid to the non-qualifying activities for software developments. Expenditure for routine activities, such as simple bug-fixing, fine-tuning, non-functional testing, planning and design, that are not aimed to solve technological challenges must be excluded from a claim.

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