R&D tax credits: In-house software development

Following our article on SME R&D tax credits, here we provide specific guidance on capital vs revenue expenditure for businesses undertaking software development projects seeking to make a claim.

Many organisations undertake projects to develop bespoke software solutions to meet the unique needs of their business or their customers. In accordance with the general R&D tax credit rules, only expenditure which is classified as ‘revenue’ in nature may be included in any R&D tax relief claim. While expenditure that is classified as ‘capital’ in nature cannot be factored into any R&D claim, R&D capital allowances may be available to accelerate tax relief in its respect.

Specific detailed guidance exists to establish whether an in house software development project is a capital or revenue project and whether expenditure on a project is ‘revenue’ or ‘capital’ in nature. The position will ultimately depend on the facts and circumstances surrounding each particular case.

It is not uncommon that a business may wish to strengthen its balance sheet by capitalising expenditure on developing a bespoke software solution in its accounts. Amongst other criteria, to capitalise expenditure on an internally generated intangible fixed asset in its financial statements, under FRS102 & IAS38, a company must be able to demonstrate the technical feasibility of completing the asset so that it will be available for use or sale. Only costs from the date this and other relevant criteria are met may be recognised as an intangible fixed asset.

However, in contemplating whether or not to capitalise expenditure incurred on developing a bespoke software solution in its accounts, a company should give careful consideration as to how that may impact or interact with any valuable R&D tax relief claim it seeks to pursue.

The overall corporation tax treatment of expenditure on the project must also be considered to ensure any relevant claims and elections are made to access the maximum relief available at the earliest opportunity.

This article was written by Richard Grimster a Tax Partner at Price Bailey. If your company has undertaken or is undertaking a project to develop bespoke software and considering make an R&D claim, contact our Tax team via the form below to ensure you achieve the most favourable outcome available.