In Ireland, the tech industry has seen tremendous growth, with cities like Dublin and Galway proving especially attractive to software development start-ups. There are many reasons behind this, including, software company clusters, local government support agencies and high levels of professional talent. Moreover, Ireland has a low rate of corporate taxation, although most start-ups do not incur this tax as they are pre-profit. The #1 incentive to scaling start-ups in the software development space is their potential ability to claim 25% of their eligible expenditures as R&D tax credits. For start-ups in the early stages of growth, tax credits can be a crucial means of extending your runway until your company reaches a sustainable point of scale.
For example, let’s suppose your software development start-up incurs the following costs:
- Software Developer: €70k
- Junior Developer: €30k
- Additional costs: €100k
- Total Costs: €200k
You will need to assess the total costs to determine which portion of your costs are eligible for R&D tax credits. Once you have determined this, and once you have a technical assessment of your projects to back you up, you can claim 25% of the cost in tax credits. For example, if 70% of the people costs and 30% of the overhead costs were allowable, this would be a total of 100k. You can then claim a tax credit refund of 25% of that, which would be €25,000.
Unfortunately, far too many companies fail to get this far. The process of applying for R&D tax credits is complicated. And software development start-ups often have difficulty ascertaining which parts of their research qualify as ‘R&D’ in the eyes of Revenue. This is where ProfitPal comes in. We assess your claim and submit your Revenue application in a way which fits in with the agile development you are already using.
What Qualifies and Doesn’t Qualify for R&D Software Development?
Essentially, to qualify for R&D tax credits, a project must either a) advance scientific or technical knowledge, or b) create new products, devices or materials, or improve what’s already there. According to the Research and Development (R&D) Tax Credit Guidelines, Revenue has attempted to narrow the definition of R&D in relation to software development. Their new definition includes:
- Development of mathematical models or algorithms to achieve a goal
- Translating those algorithms into code in order to achieve that goal
- Building the application or tool so that it continues to function in different scale environments, and across different platforms
- Ensuring that the application or tool will integrate functionally with other applications or systems.
However, it’s important to be aware that Revenue has an even longer list of software development that does NOT qualify as R&D activity.
- Software developments using existing methodologies and tools with standard features in standard environments do not qualify as ‘advancing technology’ or ‘resolving technological uncertainty’.
- User acceptance testing, used to satisfy users as to the product’s accuracy and completeness
- Routine analysis, copying, upgrading or adaption of an existing product, process, service or material
- Development work aimed at packaging a product for a market without any scientific or technological uncertainty
- Inclusion of features or functionality where no scientific or technological certainty exists.
It’s very telling that their list of what does qualify is shorter than their list of what doesn’t. And to the founder who is new to tax credit claims, the entire process can seem daunting. To complicate matters further, most projects contain both qualifying R&D and non-qualifying R&D. And those two activities can be difficult to apportion.
Where Is the Boundary Between What Can and Can’t Qualify?
It is crucial to be able to distinguish between routine software development and that which is eligible for R&D tax credits. In the case of the latter, the primary qualifying factor is whether it is seeking to solve a technological uncertainty. And, if so, whether that solution will result in technological advancement. If there is no technological uncertainty, there is no R&D.
When it comes to software development, the advance does not result from the application layer, as with R&D for other industries. Rather, the qualifying advance to science comes from the technology that went into making the application. Thus, it is the advancement of the underlying technology that establishes a software development activity as eligible for R&D. As such, your claim needs to focus on the underlying technology itself, rather than just the software product or process. When you make an R&D tax credit claim for software development, it’s vitally important to include a competent technical professional (usually a senior developer) in the information-gathering stage of the process.
Software is a continually evolving field. New applications are developed at breakneck speeds for a variety of different branches. There have been many recent innovations in such fields as AI, data-processing and storage, cloud computing, augmented reality, software-defined networking, robotics and videogames. Thus, there is enormous potential that your development activities will allow you to make a successful R&D tax credit claim. For example, your company could develop a novel software capability to improve the speed of a system. It might optimise or re-architect an existing software system. Or it could integrate different technologies that did not already interoperate.
What Tasks in the Software Development Loop Qualify in an R&D Tax Credit Claim?
Qualifying activity must be systematic in nature. Agile development methodologies fit this definition, even though they don’t exhibit the linear nature of a historical and traditional waterfall software lifecycle. This doesn’t mean everything developed in an agile manner is included. It simply means it could be.
Activities which Revenue would consider as eligible for R&D tax credits include:
- defining technical objectives;
- identifying uncertainties;
- feasibility studies;
- reviewing new and competing technologies;
- analysing, designing and developing the technology;
- producing technical specification or other documents to explain and support the R&D project and advancement;
- testing the product, process or software;
- planning and managing projects.
Revenue’s intent is clearly to look for structured phases, and perhaps some sacrificial phases that are not claimed as R&D.
R&D tax credits can be a highly beneficial windfall for a start-up. And they can provide much-needed capital during the early stages of scale. However, companies that submit their own claims run the risk of not requesting the full amount they’re entitled to. And if their claim is selected for an audit, they will have to go through it without support. This can be a costly, frustrating and time-consuming process, and can pull founders away from other aspects of running a business. Hiring a professional to submit your R&D tax claims for you is a necessary precaution, for these reasons
ProfitPal are an outsourced finance and accounting team who specialise in filing R&D tax credit claims for software development start-ups. Our team of professionals have years of expertise in submitting tax credit applications, and we’ll make sure your submission is both accurate and that it requests the maximum amount of funds that you are entitled to. We have a 100% success rate spanning 8 years, and have netted our clients over 20 million euros in R&D claims.
If you are unsure as to whether your company qualifies for R&D tax credits, or if you have any more questions about our process, get in touch with us and we would be happy to answer them for you.
For an overall definition of what R&D tax credits are, and how ProfitPal can file your claim with Revenue and help you get the maximum refunds for your expenditure, read our blog post: Claiming Your Research and Development (R&D) Tax Credits.