Guidance for Software Development companies

With R&D Tax Relief in HMRC’s field of focus, now more than ever, it is key that companies understand what exactly is claimable. Software is especially complicated due to the fast-paced nature of the industry with technological advances constantly being sought after and behind achieved. This article aims to provide additional information regarding what is claimable software developers.

The first step is to acknowledge that all projects are subject to the BEIS Guidelines and if the criteria can be met, then eligible activities will be claimable.

There are four core components which we will provide a bit more context to later in the article:

Baseline of the industry
Seeking an Advance in Science or Technology
Facing scientific or technological uncertainties
The use, employed or outsourced, of Competent Professionals (“CPs”)

As part of this article we will be including an example project, in which we will include summarised project information to give a sense of what HMRC are expecting. Let's say the company is called Automotive Auto-repair Bots Ltd, who are seeking to develop a robotic automation software for car repairs. The project is titled "Robot Panel Beaters".

There is also a special circumstance software development can be claimed for R&D purposes which in itself is not an R&D project, but we’ll come back to that.

Baseline of the Industry

The baseline of any project is:

Publicly available knowledge; and,
Readily deducible solutions by CPs.

Effectively this is what can the industry and its CPs currently do? For R&D projects this might lead to the questions, why can’t it do what I want? What is missing?

It could be that there is a software that does some of what you need; however, there is a significant gap of functionalities you would need for it to be viable. With research you’ve seen there are no add-ons and your CPs do not know how that gap could be technologically bridged.

As previously noted, the software industry is fast-paced meaning that for projects that span multiple periods, it will be necessary to update the baseline to ensure it is accurate. An advancement since the previous claim could mean aspects of the project no longer qualify for R&D Tax Relief.

For Automotive Auto-repair Bots Ltd, their baseline for Robot Panel Beaters could be:

The car repair industry utilises highly skilled labour to repair cars, with different personnel fulfilling functions at various stages. Whilst there are tools for the multitude of tasks in car repair, these are manually handled and often require other tools to function such as air compressors or pumps to function.

From market research undertaken and the knowledge of the Competent Professionals, there are no known robotics for this sector of the market. It is acknowledged that there are robotics used within car manufacture; however, that is typically more linear and does not require the ability to analyse and act accordingly.

The complexity of the output sought has meant that a significant proportion of this project is outside the readily deducible knowledge of the CPs and there is not any publicly available knowledge either. Other companies may be working on similar projects, but the information is held as a trade secret and as such is not publicly available.

Advance Sought

The advance is what were you seeking to achieve, typically identified after exploring what is readily available from the industry and what the CPs are capable of producing with existing knowledge and technologies.

We need to be careful here as we are looking at the scientific or technological advance, not a commercial advance. Simply because it is not commercially available does not mean it is an advance for R&D Tax purposes. In some instances, existing technologies and capability can produce entirely new commercial software functionality, which is great but that would not qualify.

CPs should know or be capable of finding out if something is possible with existing markets tools and knowledge or whether further development is required.

HMRC have also specifically stated they want to know the specific field you are advancing, be that robotic process automation, augmented reality or artificial intelligence.

For Automotive Auto-repair Bots Ltd, their advance for Robot Panel Beaters could be:

The Company sought to develop a robot, with necessary apparatus and tools, utilising cage artificial intelligence built from machine learning to effectively replace the need for human labour in car repair.

Specifically the Company sought to develop two core areas:

A physical robot capable of manoeuvring around vehicles and perform repair processes.
An artificial intelligence system to operate the robot that can identify faults and repair them, with the capability of using tools.

These advances fall within the field of Mechanical Engineering and Artificial Intelligence, part of Computer Science, and the advance sought is an appreciable improvement on existing market capabilities, as per paragraph 9c in the BEIS guidelines.

Uncertainties Faced

Once you’ve exhausted the market’s knowledge and the capabilities of your CPs, then you are faced with the uncertainties.

It is the activities undertaken to overcome uncertainties that are eligible for R&D Tax Relief, such as:

Planning
Analysis, design and development
Testing

As long as the work directly relates to the solving of uncertainties, it will qualify.

Maintenance and debugging of systems can qualify if the problem identified cannot be resolved with readily available knowledge or capabilities. Be careful though, as routine maintenance of systems would not qualify.

Please note that for the R&D technical report that must be submitted alongside a claim, the uncertainties faced will need to be provided as well as the activities undertaken to overcome them.

For Automotive Auto-repair Bots Ltd, their uncertainties for Robot Panel Beaters could include information on:

How to enable the robot to move around the car.

Details regarding the concepts built and tested, including details as to why they did or did not work. For example, the Company attempted to build a robot with legs to move around; however, this noted that the robot was often unstable or unable to hold position when trying to unbolt a panel or pull out a dent.

How to teach the robot to identify faults or issues in a car.

Details regarding the architecture built and how that then became the framework. Details on tests undertaken as the system was fed data on undamaged and damaged cars and seeing if the robot could 'see' problems, including specific examples.

How to enable the robot to smoothly and accurately operate tooling.

Details regarding building the code and tests undertaken with the robot attempting to undertake tasks, and, depending on the learning route, information about how the robot was 'trained' to see if that route was possible.

Please note that this area of the technical report would contain lots of specific information to clearly illustrate the uncertainties faced.

Competent Professionals ("CPs")

CPs are those with relevant qualifications and/or experience in the field this project is in. They can have various titles such as software developer, software engineer or model and risk expert.

CPs are crucial to R&D Tax Relief claims, as without them, how would you truly know what the industry is capable of and what you are trying to advance technologically?

The Competent Professionals for R&D projects can be employees or subcontractors. If they are subcontractors as long as certain criteria are met, the work will still be claimable in your business.

To generate the technical report for a R&D Tax Claim, it is important that the CPs provide detailed technical information regarding the advance, baseline and uncertainties.

For Automotive Auto-repair Bots Ltd, their uncertainties for Robot Panel Beaters could be:

Paul Atkins - Panel Beater for over 30 years, with experience in engine repair as well. Paul has repaired all sorts of vehicles from cars to buses. His understanding of how to repair vehicles, including identifying the best way to make the repair, include suitable tools, is ideal for understanding the output functionality required of the robot.

Jason Hanlon - Robotics Software Engineer with a Masters in Robotics from a major university. Jason has worked on numerous innovative robotic projects that have results in successful advances in technology.

Special Claimable Circumstances

An R&D Tax Claim can be made for the development of a software whose purpose is to directly assist with the solving of uncertainties of a different R&D project.

For example, the development of a data analytic software that helps a chemical manufacturing company to track the perishing rates of new chemicals being developed.

The software being developed does not have to be pushing the boundaries of technology, but it has to be solely used for the advancement of another R&D project and nothing else.

An example of this could be that a Company is seeking to identify which prototype has the best shelf life, with various check required to ascertain this, so they build an analytical software that takes data inputted from tests and computes it to produce easily understood answers, thus assisting with finding the best prototype.

Useful Links

HMRC have specific software guidance here under CIRD81960 to get insight on their interpretation of R&D Tax Relief and Software Development.

For more information on how to claim R&D Tax Credits, please see our blog.