R&D Tax Credit Calculator for Software Companies

How R&D Tax Credits Work for Software Companies

R&D tax credits are a UK government incentive that allows companies to reduce their tax bill or receive a cash payment for qualifying research and development activities. For software companies, this typically means work that involves resolving technological uncertainty, such as building new systems, developing novel algorithms, or overcoming significant technical challenges.

Since April 2024, the UK operates two main R&D tax relief schemes: the merged RDEC scheme (for all companies) and ERIS (for R&D-intensive SMEs that are loss-making).

Merged RDEC Scheme

The merged Research and Development Expenditure Credit (RDEC) applies to all companies regardless of size. The credit rate is 20% of qualifying R&D expenditure. For profitable companies, the credit is taxable at the corporation tax rate (currently 25%), giving an effective net benefit of approximately 15%.

Loss-making companies that do not meet the ERIS R&D intensity threshold still claim under merged RDEC. The credit can be used to offset corporation tax or, if there is no tax liability, paid out as a cash credit.

ERIS Scheme (R&D Intensive SMEs)

The Enhanced R&D Intensive Support (ERIS) scheme is available to loss-making SMEs whose qualifying R&D expenditure represents at least 30% of their total expenditure. Under ERIS, companies can claim an enhanced deduction of 86% on top of their qualifying spend, then surrender the resulting loss for a payable tax credit at 14.5%.

This means a qualifying startup spending £200,000 on R&D could receive a cash payment of up to £53,940 from HMRC. ERIS is particularly valuable for pre-revenue and early-stage software companies.

What Qualifies as R&D in Software?

HMRC defines qualifying R&D as work that seeks to achieve an advance in science or technology by resolving scientific or technological uncertainty. For software companies, qualifying activities typically include:

• Building systems where it is not clear whether the technical approach will work
• Developing new algorithms, data processing techniques, or machine learning models
• Overcoming integration challenges with complex third-party systems
• Creating solutions that require significant performance optimisation beyond standard approaches
• Developing new security mechanisms or encryption approaches
• Building real-time systems with demanding latency or reliability requirements

Routine development, bug fixing, cosmetic UI work, and using established technologies in standard ways do not qualify. The key test is whether a competent professional in the field would recognise genuine uncertainty in the approach.

Read our detailed guide on what qualifies as R&D in software for more examples.

Qualifying Cost Categories

Staff costs

The largest category for most software companies. Include gross salary, employer National Insurance, and employer pension contributions for developers, engineers, data scientists, and technical architects working on qualifying projects. Only the proportion of time spent on R&D qualifies, so you need to apportion based on actual time records.

Cloud computing costs

Since April 2023, cloud computing costs used directly in R&D activities qualify. This includes compute, storage, and networking costs from providers like AWS, GCP, and Azure. Only the portion directly attributable to R&D (not production workloads) can be claimed.

Subcontractor costs

External developers, agencies, or consultants performing R&D work on your behalf. You can claim 65% of what you pay them. This cap reflects that the subcontractor captures some of the value of the R&D.

Software licences

Specialist development tools, testing frameworks, and data analysis software used directly in the R&D process. General-purpose office software and standard IDEs do not qualify.

How to Strengthen Your Claim

HMRC expects claims to be supported by contemporaneous evidence (records created at the time the work was done). For software companies, the strongest evidence includes:

• Git commit history showing what developers worked on and when
• Project management records (Jira, Linear, GitHub Issues) documenting technical challenges
• Architecture decision records showing uncertainty and multiple approaches considered
• Technical documentation describing the problem, attempted solutions, and outcome

CodeClaim analyses your Git history to help identify potential qualifying R&D activities and generate draft reports for review by your tax adviser.

Frequently Asked Questions