Recent government guidance has clarified research and development (R&D) tax incentive requirements. 

The guidance applies to companies involved in software development seeking to claim the R&D tax incentive. It explains that developing and modifying existing software will only meet R&D criteria if done as an experiment to generate new knowledge. 

The guidance indicates that companies should keep detailed and contemporaneous records as proof that each R&D activity occurred and meets requirements. To be eligible for an R&D tax claim, records must demonstrate that a business is testing for an outcome that’s unknown and that can only be determined using a systematic progression of work through applying scientific principles and a hypothesis to experiment, observe, evaluate and come to logical conclusions. Supporting R&D activities may also be eligible.

Software-based businesses should be aware that not all activities involved in a software development project will be eligible for the R&D tax incentive. For example, the guidance states that bug testing, data mapping, data manipulation and system testing generally won’t be eligible.

Whether the guidance creates substantive change is up for debate. The Government claims that the guidance merely provides clarity around tax laws. However, commentators have insisted that the guidance indicates that the R&D scheme is changing, or at least suggests that a crack-down is underway.

Going forward, companies seeking to claim the incentive should accurately record each R&D activity as it unfolds, ensuring that the records show that each activity satisfies eligibility requirements. Then, when it comes to claiming the R&D tax incentive, companies should claim eligible R&D activities separately, rather than making one claim over an entire project.

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