R&D Tax Credits
How to Calculate R&D Tax Credits for Software Companies
A practical guide to working out how much your software company could claim, with worked examples under the current UK schemes.
The Two Schemes: Merged RDEC and ERIS
From 1 April 2024, UK R&D tax relief operates under two schemes. Which one applies depends on your company's R&D intensity (qualifying R&D expenditure as a percentage of total expenditure).
Merged RDEC
For all companies. Credit rate of 20% of qualifying expenditure, taxable as income. Effective net benefit of approximately 15% for profitable companies.
ERIS
For R&D-intensive SMEs (30%+ R&D intensity). Loss-making companies can claim a payable credit of up to 27% of qualifying expenditure.
Step 1: Identify Qualifying Expenditure Categories
For software companies, qualifying R&D costs typically fall into these categories:
Staff Costs
This is usually the largest component. Include gross salaries, employer National Insurance contributions, and employer pension contributions for staff working directly on qualifying R&D. If a developer spends 60% of their time on qualifying projects and 40% on other work, you claim 60% of their total staff cost.
Cloud Computing and Data Costs
From April 2023, cloud computing costs used directly in R&D are qualifying expenditure. This includes compute, storage, and networking costs from AWS, GCP, Azure, or similar providers. Only the portion directly attributable to R&D activities qualifies, so you need to separate development/testing environments from production workloads.
Subcontracted R&D
If you hire external developers or agencies for qualifying R&D work, you can include 65% of what you pay them. The 65% cap reflects that the subcontractor captures some of the value.
Software Licences
Licences for tools and software used directly in the R&D process (e.g. specialised development tools, data analysis software). Standard office software and general-purpose tools do not qualify.
Step 2: Calculate Your R&D Intensity
Add up all your qualifying R&D expenditure and divide by your total company expenditure. If the result is 30% or more, you may qualify for ERIS rather than merged RDEC.
Example: A startup with total costs of £400,000 and qualifying R&D costs of £160,000 has an R&D intensity of 40%. This exceeds the 30% threshold, so ERIS applies.
Step 3: Worked Examples
Example A: Profitable Company (Merged RDEC)
Qualifying R&D spend: £200,000
RDEC credit (20%): £40,000
Less corporation tax on the credit (25%): £10,000
Net benefit: £30,000 (15% effective rate)
Example B: Loss-Making Startup (ERIS)
Total expenditure: £300,000
Qualifying R&D spend: £180,000 (60% intensity)
Enhanced deduction (86%): £154,800
Total loss for surrender: £180,000 + £154,800 = £334,800
Payable credit (14.5% of surrenderable loss): up to £48,546 cash from HMRC
Note: These are simplified examples. The actual calculation depends on your specific tax position and other factors. Always have your accountant verify the figures.
Step 4: Apportion Staff Time
The hardest part of calculating software R&D claims is working out how much developer time went on qualifying activities versus everything else. Methods include:
- Time tracking records from tools like Jira, Linear, or Toggl
- Project management data showing sprint allocations and task assignments
- Git commit analysis showing how much of each developer's output was on qualifying projects
- Retrospective estimates from technical leads (acceptable but weaker evidence)
HMRC expects contemporaneous evidence, meaning records created at the time the work was done. Retrospective estimates are acceptable but carry more risk in an enquiry.
Using Commit Data for Time Apportionment
Your Git history is a rich source of contemporaneous evidence. Every commit has a timestamp, an author, and a description of what changed. By analysing commits against qualifying R&D criteria, you can build a defensible time apportionment based on actual development activity.
CodeClaim automates this analysis. It reads your commit history, classifies activities against HMRC's R&D criteria, and estimates time allocation per developer. The result is a structured breakdown your accountant can use directly in the claim calculation.
This article is for general information only and does not constitute tax, legal, or financial advice. Consult a qualified tax adviser before making any R&D tax credit claim. See our Terms of Service for full disclaimers.