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R&D Tax – What’s Going On With Software Claims?

Repeated Problems With Software Claims

There have been calls from various sectors to clarify the eligibility of Software developed under the R&D Tax Incentive Scheme. This is because so many software claims have been reviewed by the Government and deemed ineligible. The main reason for the ineligibility is because those claiming their software development as R&D are misclassifying the work.

Agile sprints are not R&D

The main reason a software development team misclassifies their work is because they believe that work done using the iterative agile development approach is R&D.

Unfortunately, under the R&D Tax Incentive Scheme, it is not. It is still claimable, but it must be classified correctly to be eligible.

Understanding the classification of work under R&D

There are two components for classification under the R&D Tax Incentive Scheme:

1.     
Core R&D
2.     
Supporting R&D

Core R&D is only the work that relates to generating new knowledge. Supporting R&D is any work required to ‘run’ the experiments to generate the new knowledge.


Let me give you an example:

A team is working on custom software for real-time voice to text output that will recognise five independent voices simultaneously and then convert the conversation in 4 x real-time using a custom speech algorithm.

They work in agile sprints to develop the overall software program, but the only new knowledge they are creating is the algorithm.

This is the core R&D that is eligible under the scheme. All the other software development work is merely required to be able to test whether the algorithm can do what they want it to do. This makes it ‘supporting R&D’ and is also eligible under the scheme.

The real problem is not whether the work is eligible to be claimed but how you classify the components within the program as either core or supporting.

The example we’ve given you above fits with the core R&D definition because it is:

  1. unique to you and in the world, and you’ve confirmed that no one in the world can give you the answer
  2. A stretch target, i.e. five voices at 4x real-time
  3. measurable against these criteria.

Getting it right simplifies the application process

Any core activity must be documented comprehensively to include:

1.     A hypothesis (what do you expect to discover)

2.     
A set of experiments to test the hypothesis

3.     
Documentation for each ‘experiment’, with the success or failure of the test included

4.     
Iteration of the experiments until you can achieve the desired outcome you outlined in your hypothesis.

This is quite a bit of work.

In the example outlined above, only about 5% of the voice to text project would be classified as a core activity. This means that instead of having to produce documentation as per the above hypothesis/ experiments/ outcomes for all the work, the team only need to do so for this small portion. Much simpler and quicker.

The supporting R&D work (ie. the rest of the software development work that is ‘supporting the Core R&D’ does not require any of this additional scientific style documentation to make the claim eligible.

Are your record of tickets and work done in Jira sufficient?

Often, when we work with software teams, we are challenged with questions around the detailed documentation they have created as part of each agile sprint.

Unfortunately, the Government will not trawl through your Jira tickets to find the information they are after. You will be required to provide the documentation they need in a format that reflects the above hypothesis and experimentation framework.

Splitting your Tickets into tasks corresponding to Core or Support is essential and being able to track the time spent into these two categories is required by the latest claim form. We can help you learn how to do this through our courses.

Templates and systems that fit with your current approach

We do understand that it is quite complicated to apply this framework to your existing work.

To help make this easier, we have developed a set of templates to apply, so it’s easy to use the correct format and language for the component you need to document as your core R&D.

If you are struggling to distinguish between core and supporting R&D activity, we also offer training to assist designed explicitly for teams doing software R&D.

Our Templates or Online Training with Templates packages provide your team with the right level of know-how in a cost-effective manner.

 

If you would like to talk more about templates, audits, or your R&D program implementation, feel free to book a 10min meeting.

We also run a regular 
R&D Discussion Group where you can learn more from both us and other companies leveraging the R&D Tax Incentive and are looking to make the process and implementation as slick as possible.

Other resources

We have several other resources that may be of interest.

6 Step R&D Tax Incentive Audit Survival eBook
Orphaned Legacy Software Rescue and Maintenance eBook
Take R&D Tax Records Self Assessment, Receive a Free Report
Learn more: R&D Tax Incentive Compliance Requirements

Please take a look at our other free resources on the Softlogic Solutions website.

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