R&D Tax Relief for Software Development

Background to R&D Tax Relief

It is not our intention here either to reword or to repeat the detailed information available from HM Revenue and Customs, which is comprehensive, authoritative and readable.

On 1st April 2000, tax relief became available for Research and Development undertaken by SMEs. The relief was set at 50% of eligible costs, so that if for example an SME incurred eligible R&D costs of say £120,000, then they would be able to protect £60,000 of their profit from any liability to corporation tax. If the 50% of eligible costs was more than their taxable profit, the company would be able to claim a payable credit.

On 1st April 2002, the scheme was extended to cover large companies as well, though they would only be able to offset 25% of eligible costs against their taxable profits. There were other differences between the SME and large company schemes (such as the requirement for SMEs to retain IPR on R&D work, which did not apply to large companies). Large companies are not able to claim a payable tax credit, and there are differences in the treatment of subcontracted costs.

For both SME and Large Company schemes, there is a minimum level of eligible costs of £10,000.

During 2004, the guidance documentation was significantly simplified, particularly as regards the treatment of software development. The simpler guidance can be used when considering claims for periods prior to its publication.