Guidance for Software Development companies
Overview 📘
Software development projects frequently qualify for R&D Tax Relief, but they also attract the most scrutiny from HMRC. The fast-moving nature of the industry, with rapid technical progress and frequent iteration, means it’s vital to identify and evidence which activities truly involve scientific or technological uncertainty.
This guide explains how software businesses can determine whether their work qualifies, how to describe advances and uncertainties, and the importance of documenting the role of Competent Professionals (CPs).
💡 The Four Core Components
Every software R&D claim must satisfy the DSIT Guidelines. The key criteria are:
- Baseline of the industry – what is already known or readily deducible?
- Seeking an advance – what new or improved capability are you trying to achieve?
- Facing technological uncertainty – what problems can’t a competent professional easily solve?
- Involvement of competent professionals (CPs) – who applied their expertise to overcome those challenges?
To illustrate these concepts, we’ll use an example project from Automotive Auto-repair Bots Ltd, a company developing robotic automation software for car repairs. The project is called “Robot Panel Beaters.”
Additional guidance on software R&D claims can be found in the HMRC Manual CIRD 81960.
🔍 Baseline of the Industry
The baseline represents the existing state of publicly available knowledge and solutions that competent professionals could reasonably deduce. It answers:
“What can the industry currently do, and what can’t it do yet?”
If tools or systems exist but cannot achieve the required functionality, and no public or readily deducible solution bridges that gap, then the project may qualify as R&D.
Because software evolves quickly, long-term projects must re-evaluate the baseline each year to ensure it remains accurate. Advancements in industry practice may render earlier uncertainties obsolete.
Example – Automotive Auto-repair Bots Ltd
The car-repair industry relies on skilled human labour and manual tools (air-powered or hydraulic). No public solutions exist for robotic automation in this specific environment. While manufacturing robots are common, they operate in controlled, linear settings, unlike repair workshops that require dynamic assessment and adaptation.
Competent professionals confirmed that there was no publicly available knowledge or existing technology to achieve the desired functionality.
💡 Advance Sought
An advance refers to a scientific or technological improvement, not simply a commercial innovation or product feature. The fact that software isn’t commercially available doesn’t automatically make it an R&D advance.
HMRC expects you to specify the field of science or technology being advanced, for example, machine learning, robotic process automation, or data architecture.
Example – Automotive Auto-repair Bots Ltd
The company aimed to develop a robotic system using machine-learning-driven AI to replicate skilled car-repair tasks normally performed by humans.
The objectives included:
• Designing a mobile robot capable of navigating vehicles and performing physical repair processes.
• Creating an AI control system that identifies damage, decides on corrective action, and operates tools autonomously.
The advances relate to the fields of Mechanical Engineering and Artificial Intelligence, representing an appreciable improvement on market capabilities (see DSIT Guidelines paragraph 9c).
🔍 Uncertainties Faced
R&D tax relief applies to the work undertaken to overcome technological uncertainties, where existing knowledge and techniques don’t provide a clear solution.
Typical qualifying activities include:
- Planning, analysis, and design work aimed at solving technical challenges
- Development and prototyping
- Testing and iteration up to the point the uncertainty is resolved
Routine maintenance or debugging is not R&D unless the problem being solved itself involves technological uncertainty.
Example – Automotive Auto-repair Bots Ltd
• Mobility challenge: How to design a robot that can move safely and precisely around a vehicle. Early prototypes with legs proved unstable when applying force; alternative track-based systems were tested.
• Perception challenge: How to train AI to detect faults in car panels. The team developed and refined a vision-based architecture, testing datasets of damaged and undamaged vehicles to measure recognition accuracy.
• Tool-operation challenge: How to control tools with precision. Multiple coding and training approaches were tested to achieve smooth, reliable motion.
💡 Each of these uncertainties was documented in the technical report, showing why the problems were difficult and how they were approached.
🧩 Competent Professionals (CPs)
Competent Professionals are individuals with relevant qualifications or experience who apply their expertise to assess what’s possible and guide the technical approach. They may be employees or subcontractors.
Their involvement is crucial, HMRC requires evidence that knowledgeable professionals deemed the challenges genuine and not easily solvable.
Example CPs – Automotive Auto-repair Bots Ltd
Paul Watkins – Panel Beater with 30 years of experience repairing vehicles of all sizes. Provided insight into the practical mechanics and expected output of the robotic system.
Jackson Hanlon – Robotics Software Engineer with an MSc in Robotics. Led the AI and control-system development, drawing on prior experience in industrial automation.
💡 CPs should contribute directly to the technical sections of your R&D report, detailing the baseline, advances, and uncertainties.
💡 Special Claimable Circumstances
Software may also qualify for R&D tax relief when developed to support another R&D project, even if the software itself is not technologically advanced.
Example:
A chemical manufacturer develops a data-analytics tool to monitor the degradation of new compounds. The software’s sole purpose is to assist the main R&D project, so the development costs are eligible.
The key condition is that the software must be used exclusively to facilitate other qualifying R&D activities.
✅ Summary
- Software R&D claims must meet DSIT Guidelines on baseline, advance, uncertainty, and competent professionals.
- Keep documentation showing how problems were approached and resolved.
- Even supporting software may qualify if it directly assists another R&D project.
- HMRC expects clear, technical descriptions, not just commercial summaries.