R&D Tax Relief for Software Development

Payroll-based assessment

In some cases, costs are not recorded in a way which supports clear association of expenditure with specific deliverables. This happens in some organisations (such as product developers) which do not bill customers directly for work done. Nevertheless, there can be significant innovation and technological uncertainty in the work, so expenditure can be eligible for the relief – the problem becomes one of identifying that eligible expenditure.

In a company developing and enhancing a world-class software product, we used an approach whereby we analysed the organisation’s structure in the context of developments carried out during the financial year in question. The company did not record project-based cost data, so the only cost data readily available was from the payroll; costs of purchases, sub-contracts and consumables were relatively small, and ignored for the purposes of the claim. Some parts of the organisation were clearly not eligible (for example sales, training and administrative staff), whereas other parts (such as design and development) were at least partly eligible.

Numerous product developments were worked on during the year - some major releases, some minor enhancements, some fault fixes. Expert advice was sought from department heads as to what proportion of their department’s effort was devoted to each type of development. Developments were assessed and allocated as either eligible or ineligible, with a tendency to caution such that developments which might be marginal were deemed to be ineligible. From this information, a claim was constructed.

The whole process was explained very carefully to the Tax Inspector, and it was made very clear that we were erring on the side of prudence by reducing the claim where there was doubt, rather than trying to maximise it in all cases. The Inspector welcomed this open approach and accepted the claim. The same approach was taken in subsequent years, with the same degree of success.