Software as a Service (SaaS) businesses spend heavily on software development and often assume the R&D Tax Incentive will cover it all. However, this is often not the case.
A SaaS product is typically a mix of routine feature work and, occasionally, genuine technical experimentation which can be claimed under the R&D Tax Incentive. This post explains where SaaS companies can claim, where they can’t, and how to build a strong R&D claim for the activities and expenditures that are eligible.
Is Software Development Eligible for the R&D Tax Incentive?
The simple answer is: yes, but not for the whole project.
SaaS companies are eligible to claim, and many do. However, only certain activities and expenses are eligible, so the SaaS companies that do claim R&D, must clearly separate the routine from the genuinely experimental aspects.
The R&D Tax Incentive assesses the experimental work behind the product, not the business model or the commercial success of the platform. R&D eligibility relies on a software development project being able to prove three things:
- It solves a genuine technical uncertainty that could not be resolved using existing knowledge or software.
- The problem was solved (or attempted to be solved) using systematic experimentation.
- It was conducted to generate new knowledge.
During a software development project, there may be aspects that genuinely meet this criteria, but there is also likely work that is routine and based on existing knowledge. Understanding and being able to document and prove the difference is the key to a strong R&D claim.
Why SaaS R&D Claims Are Harder Than They Look
Most SaaS development is iterative: ship a feature, gather feedback, refine. That cycle is valuable commercially but usually resolves known problems with known techniques. These processes will typically not be eligible for the R&D Tax Incentive, however, if your project hits a roadblock and you are unable to move forward using known techniques and are forced to experiment in order to find a solution, that aspect of the project may be eligible.
A software development project is rarely eligible as a whole, but frequently there will be aspects and activities that are. This is where it can become complicated.
Continuous development and delivery makes it it easy to blur routine development and experimental work, but claiming the R&D Tax Incentive relies on businesses being able to keep them separate. R&D claims should clearly document all genuine experimentation, while omitting the routine work, including a mixture can attract scrutiny from regulatory bodies and result in audits or rejection.
SaaS Work That Typically Doesn’t Qualify
To qualify for the RDTI, a software project must go beyond standard coding or routine commercial product updates. Any work that is routine and can be completed using existing knowledge, techniques and software will not be eligible.
This typically includes projects such as:
- Building new features using established frameworks and patterns
- Standard UI/UX design and front-end work
- Integrating third-party APIs in documented ways
- Routine scaling, bug fixes and performance tuning using known techniques
- Standard multi-tenancy, authentication and billing implementations
- Migrations and re-platforming using established approaches
SaaS Work That Can Qualify for R&D
To be eligible for the R&D Tax Incentive, software development projects and activities must feature a technical uncertainty which must be solved using a systematic progression of work.
Many software projects feature core activities that are genuinely eligible, such as:
- Solving performance or scale problems where no existing approach meets the requirement
- Novel algorithms at the core of the product
- AI and machine learning features that need systematic experimentation to reach required accuracy
- New data processing or synchronisation approaches where the technical path is genuinely unknown
- Security or data integrity challenges without an established solution
- Real-time systems with latency or reliability constraints that existing architectures can’t meet
Supporting R&D Activities in SaaS Projects
In addition to the core activities, SaaS businesses can also claim a range of supporting activities and expenditure that directly support the experimentation and completion of the core activities. While these activities cannot be claimed on their own, they can be claimed when directly linked to the core activities that they supported.
This includes things such as:
- Test environments
- Tooling
- Data preparation
- Infrastructure
SaaS Expenditure That Can be Claimed
Many software expenses can also be claimed under the R&D Tax Incentive, as long as they are linked to an eligible experimental activity and are documented clearly. This includes expenses, such as:
- Developer and data scientist salaries apportioned to eligible work
- Contractor fees for eligible activities
- Cloud infrastructure and compute tied to experiments
- Tooling and software licences used in eligible activities
- Apportioned overheads
While SaaS businesses cannot claim whole-team salaries or production hosting costs, there are many expenses that can be claimed to offset costs. The key is clear documentation that links the expenses to the eligible activities and not mixing routine expenditure with eligible expenditure.
Required Documentation to Support SaaS R&D Claims
To create a strong R&D claim, SaaS businesses need to maintain clear, detailed and up-to-date documentation of all experiments and activities. Records should be created as the work is completed (not recreated after-the-fact) to ensure it is accurate and includes all details.
Many of the required records will be created naturally as part of the development process, the key is to keep them clearly marked as R&D to prevent mixing routine and experimental. You can do this by creating a tag in your existing CRM or task management tool.
Key contemporaneous documentation for strong SaaS R&D claims can include:
- Jira tickets stating the technical unknown
- GitHub histories
- Sprint retrospectives
- Architecture decision records
- Test results (including failures)
- Timesheets or sprint allocations linking developers to specific experiments
Calculating the Benefits for SaaS Projects
The R&D Tax Incentive is delivered differently depending on the business’s aggregated turnover. For early-stage SaaS companies and startups with aggregated turnover under $20 million, the incentive is delivered as a refundable tax offset equal to the eligible entity’s tax rate plus an additional 18.5% premium. This allows pre-revenue and loss-making SaaS startups to still receive cash for eligible R&D work. For businesses that have tax losses the benefit will be 43.5% back in cash. Whilst for businesses in a profit the net benefit will be 18.5% in either cash or a tax saving.
For businesses with $20 million or higher turnover, the incentive is delivered as a non-refundable offset equal to the eligible entity’s tax rate plus a two-tiered premium based on the notional R&D expenditure for the income year.
Explore our guide to calculate your potential R&D benefits.
Create a Strong R&D Claim for Your SaaS Project
SaaS companies can claim the R&D Tax Incentive, but the claim sits in the eligible experimental work behind the product, not the product itself. Teams that are able to identify their technical unknowns, document their experiments as they go, and separate that work from routine delivery are best placed to claim with confidence.
At Rimon Advisory, our R&D Tax consultants have extensive experience in the R&D Tax Incentive for software development and can help SaaS businesses determine eligible activities, create detailed documentation, and create strong R&D claims.
