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Research and developments

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Research and development – again – this time as the credits can apply to software expenditure

R&D tax credits for Small and Medium Sized Enterprises (SME) have increased to 225% with effect from 1 April 2012 writes Margaret Connolly, Head of Tax at Reeves. This fact is probably not news to you, as you will in recent months have faced a fusillade of articles on this subject – a practice of which we are not wholly innocent! So, how to justify yet another treatment of this topic?

My subject today is quite specific – the place of software development costs within the scheme of R&D tax credits. Software has a special characteristic, in that it can qualify for R&D on two discrete levels. It can be both a necessary instrument of the R&D project, and in some cases the subject matter of it.

At the instrumental level, HMRC have published very useful guidance in the specific area of software development and this guidance is due to be updated. However, as a broad brush guide any costs of development of software that is used as an element of a larger R&D project should qualify for the tax credits, for example the development of data handling or data storage software needed to record and monitor results of the R&D project.

The software itself need not involve a specific advance in science or technology; provided that directly contributes to a larger R&D project it should still qualify for the tax credits. Hence in this instance it is not necessary to show there has been a technological advance in the software itself. Provided an advance has occurred with regards to the overall project, then the costs should qualify.

Similarly, the development of new operating systems, creating new search engines and resolving conflicts between hardware and software should all qualify for R&D tax credits.

Reeves would be delighted to help clarify whether or not you do qualify for such credits, please contact any member of the Reeves corporate tax team by phoning 01227 768231 or by emailing

Author:Reeves & Co LLP