R&D tax credits are a valuable incentive for companies investing in innovation. One of the key components of these claims is software licences. Understanding what software licences can be included in R&D tax credit claims is crucial for maximising your benefit. This guide provides a comprehensive overview of eligible software licences, ensuring you make the most of your R&D tax credits.
Software Licences in R&D Tax Credit Claims: What is Classed as Software?
Software licences refer to the expenditure incurred for software, including cloud computing and data costs, which are directly employed in the R&D process. These can be categorised into:
- Software for Direct Activities: Software used to carry out activities that directly contribute to overcoming project uncertainties, such as development or testing software.
- Software for Qualifying Indirect Activities (QIAs): Software used for supporting functions like HR, accounting, or project management, which indirectly contribute to the R&D process.
Calculating R&D Apportionments
Similar to staffing and subcontracted costs, expenditure incurred for software licences must be apportioned relative to the extent it is used for qualifying R&D activities. Here are the methodologies for apportioning costs:
- Software for Direct Activities: If the software is solely used for qualifying R&D projects, 100% of the relevant cost can be claimed. However, if the software is partly used for non-qualifying activities, the expenditure should be apportioned. An acceptable method is to divide the R&D staff costs of direct staff (competent professionals) by the total staff costs of direct staff to get an R&D percentage. Project tracking tools can also be leveraged to support this analysis.
- Software for QIAs: For software used to carry out qualifying indirect activities, it is essential to apportion the costs appropriately unless the software is used solely for qualifying activities. An acceptable method is to divide the R&D staff costs of direct staff by the total company staff costs to get an R&D percentage.
Information Needed for Claims
To calculate software licence costs for R&D tax credit claims, the following financial reports are typically required:
- Detailed Profit and Loss (P&L) Statement: A summary of expenditure incurred for the period.
- General Ledger: Details of the expenditure incurred, including invoice date, account, description, and cost.
Detailed Breakdown of Eligible Software Licences in R&D Tax Credit Claims
To further understand what software licences can be included in R&D tax credit claims, let’s delve into more specific details:
- Development Software: This includes software used for coding, testing, and debugging. If the software is used exclusively for R&D projects, the full cost can be claimed.
- Testing Software: Software used for testing prototypes or final products. If it is part of the R&D process, it is eligible for the claim.
- Cloud Computing Services: Costs associated with cloud services used for R&D activities, such as data storage and processing, can be included.
- Project Management Software: If used to manage R&D projects, a portion of the cost can be claimed based on the extent of its use in R&D activities.
- HR and Accounting Software: If these are used to support R&D activities, a portion of the cost can be claimed as qualifying indirect activities.
Apportioning Costs for Mixed Use
In many cases, software may be used for both R&D and non-R&D activities. Accurately apportioning these costs is crucial. Here are some strategies:
- R&D Staff Percentage: Determine the percentage of R&D staff costs relative to total staff costs and apply this to the software cost.
- Project Tracking: Use project tracking tools to allocate software costs based on actual usage in R&D projects.
Importance of Accurate Record-Keeping for Software Licences in R&D Tax Credit Claims
Accurate record-keeping is essential for substantiating R&D tax credit claims. Companies should maintain detailed records of:
- Software Licences: Copies of software licence agreements and invoices.
- Usage Records: Documentation of how the software is used in R&D activities.
- Financial Records: Profit and loss statements, general ledgers, and other financial documents to support the claim.
Common Challenges and Solutions
Claiming R&D tax credits for software licences can be complex, and companies often face challenges such as:
- Determining Eligibility: Not all software licences qualify as R&D. Companies should refer to HMRC guidelines or consult with R&D tax credit experts at FI Group to ensure eligibility.
- Apportioning Costs: Accurately apportioning costs for software used in mixed activities can be challenging. Using detailed usage records and project tracking can help.
- Maintaining Documentation: Keeping thorough and accurate records is crucial. Implementing robust record-keeping systems can streamline the process.
To see a full list of HMRC guidelines for software licenses visit here. Otherwise you can contact FI Group via the button below.