Research and development tax relief has become a vital tool for software businesses. Whether you’re building a new cloud-based service, experimenting with AI, or improving the performance of an existing platform, there’s a good chance your work could qualify for support from the government.

But even with the incentive being available for years, many companies still don’t realise they’re eligible. Others aren’t sure how to claim or worry that the process is too complex or risky. This guide is here to help. It covers everything you need to know about R&D tax relief as a software business in the UK including who can claim, what qualifies, and how to avoid common mistakes.

What Is R&D Tax Relief?

R&D tax relief is a government-backed scheme designed to support innovation. It allows companies to recover a portion of the money they spend on research and development. The idea is to reduce the financial burden that often comes with trying to solve difficult technical problems or push the boundaries of what your product can do.

The key is that your work must involve a level of uncertainty. You need to be trying to solve a problem that doesn’t have an obvious solution, and the solution can’t be easily found by a skilled professional using standard knowledge.

Why Software Companies Often Qualify

R&D tax credits for software development fits the government’s definition of R&D very well. That’s because it often involves innovation, technical testing, and original problem-solving. In fact, software has consistently been one of the most common sectors for successful claims.

Some examples of projects that could qualify include:

• Creating a new software product that performs tasks in a novel way
• Developing an API that integrates systems in a way not done before
• Improving the speed, reliability, or scalability of existing platforms
• Solving compatibility issues across devices or browsers
• Working with new or unproven technologies like AI or blockchain

It’s not about how the software looks or whether it ends up in a commercial product. The focus is on the process – the challenges faced and how your team tackled them.

What Counts as Eligible R&D Work?

To qualify, your project needs to meet HMRC’s definition of R&D. That means it must aim to achieve an advance in science or technology and involve a level of uncertainty that couldn’t easily be resolved by a competent professional.

Let’s break that down a bit further:

• Advance: You need to be pushing beyond what’s currently available. That doesn’t mean it has to be brand new globally, but it should be new to your company or your industry.
• Uncertainty: There must be challenges that don’t have a known solution. For example, you might not know if a certain approach will work, or you might need to build something from scratch rather than using existing tools.

Software businesses working on projects with technical complexity often meet these criteria, especially if they’re doing more than just standard configuration or applying off-the-shelf solutions.

Examples of Qualifying Projects in Software

The range of qualifying projects is wide. Here are a few examples that often meet the criteria:

• SaaS Platform Development: Building a scalable SaaS platform that handles large volumes of users, especially if you’re developing a new approach to database management or user access.
• Cybersecurity Features: Developing a unique way to detect and stop threats in real-time, especially if standard libraries and tools are not enough.
• Machine Learning Integration: Training a model to provide intelligent recommendations within an app, where the training process and data handling involved unknowns.
• Performance Enhancements: Rewriting code to improve speed, especially if existing methods have failed and you’ve had to try multiple new approaches.
• Cross-Platform Solutions: Making a web application work seamlessly on mobile devices with different screen sizes and performance capabilities.

These projects often involve building prototypes, trial and error, and creating new algorithms or logic structures – all of which can qualify for relief.

What Costs Can Be Included?

The scheme allows you to include several types of costs as part of your claim. These need to relate directly to the R&D project, and you’ll need to show how they connect to the work.

Common eligible costs include:

• Staff Wages: The time your employees spend on R&D can be included. This often covers developers, testers, technical architects, and even project managers if they’re involved.
• Subcontractor Costs: If you bring in outside help, such as a specialist developer or software engineer, their costs might also qualify – though the rules are different for UK vs overseas workers.
• Software Licences: If you use software tools that are directly needed for the R&D project, those costs can be included.
• Consumables: This includes things like cloud storage or server time if they’re used specifically for development or testing.
• Prototypes: Costs related to creating test versions or proof-of-concept systems can sometimes be claimed, especially if they’re not later sold or used commercially.

Being able to show how these costs link to the R&D work is essential. That’s why keeping detailed records throughout the project is so important.

Common Mistakes to Avoid

Despite the support available, many businesses either miss out or make errors when submitting their claim. Here are some of the most common pitfalls:

1. Missing Eligible Work Sometimes, companies don’t realise certain parts of a project qualify. For example, internal tools or failed attempts still count, as long as they meet the criteria.
2. Poor Documentation If you don’t keep proper records, it can be hard to show HMRC what work was done and why it was R&D. Notes, emails, timelines, and code versions all help.
3. Wrongly Categorised Staff It’s important to separate who did what. If someone only worked part-time on the project, you’ll need to show how much time they spent and on which tasks.
4. Late Notifications New rules require companies to notify HMRC of their intention to claim within a certain time period after the end of the accounting year. Miss this, and you may lose your chance to claim.
5. Overclaiming or Underclaiming Getting the numbers wrong, or applying the wrong percentages, can lead to claims being rejected or reduced.
6. Misunderstanding Subcontractor Rules There are strict guidelines around who counts as a subcontractor and whether they’re UK-based. If you get this wrong, you could lose a big part of your claim.

Final Thoughts

If you’re a UK software company doing original development work, it’s worth taking a close look at R&D tax relief. It can help offset the costs of innovation and give you more room to grow.

The scheme isn’t just for cutting-edge research or big science firms. If your team is solving problems that haven’t been solved before, testing ideas, and pushing the limits of what’s possible, you may well qualify.