R&D Tax Credits Update; Software testing, debugging, maintenance and conversion related exclusions


Routine de-bugging of existing computer software

Routine de-bugging is the process of fixing errors or faults in software. De-bugging may be systematic, but it does not seek to resolve scientific or technological uncertainty and does not qualify as a core R&D activity.

Where the creation of new software is an R&D activity, debugging that new software may be eligible as a supporting R&D activity.

Routine debugging of existing software is however excluded as a supporting R&D activity.


Routine software and computer maintenance

Routine computer and software maintenance includes regular tasks such as updating security patches, installing software updates, backing up data and uninstalling unused programmes. It is good practice to undertake these tasks systematically, but they are excluded from qualifying for the tax credit because they do not seek to resolve scientific or technological uncertainty.

Routine software and computer maintenance is also excluded from being a supporting R&D activity.


Bug testing, beta testing, system requirement testing, user acceptance testing, and data integrity testing

  • Bug testing is the process of finding errors or faults in software.
  • Beta testing is the second phase of software testing in which a sample of the intended audience tries the product out.
  • System testing is testing conducted on a complete integrated system to evaluate the system’s compliance with its specified requirements.
  • User acceptance testing (UAT) is the last phase of the software testing process. During UAT, actual software users test the software to make sure it can handle required tasks in real-world scenarios, according to specifications.
  • Data integrity test techniques verify that data is being stored by the system in a manner where the data is not compromised by updating, restoration, or retrieval processing.

Although these activities may use a systematic process, they themselves do not seek to resolve scientific or technological uncertainty.

Where there is an eligible core R&D activity, testing may be eligible as R&D activity.

Example: Ineligible beta testing

A company has released an innovative new software product for beta testing. Although the product is new and innovative, and the testing uses a systematic process there was no scientific or technological uncertainty in the development of the new product.

Because the testing is not testing whether scientific or technological uncertainty has been resolved it is does not qualify as a core R&D activity.


Example: Testing which may qualify as a supporting R&D activity

A company which specialises in driverless vehicle design is developing its product in a way that requires the resolution of technological uncertainty. Bug testing, of the software in the control module while not directly related to the resolution of the technological uncertainty, may qualify as a supporting R&D activity.

Expenditure on testing undertaken after the technological uncertainty has been resolved will not be eligible for the tax credit.


Data mapping and data migration testing

In computing and data management, data mapping is the process of creating data element mappings between two distinct data models. Data mapping is used as a first step for a wide variety of data integration tasks.

Data migration testing is required when data is being moved from one system, often a legacy system, to another system.

Although these activities may use a systematic process, they do not themselves seek to resolve scientific or technological uncertainty. These activities do not qualify as a core R&D activity.


Testing, or comparing the efficiency, of algorithms that are already known to work

Tests that simply compare efficiency of existing products, processes, systems or algorithms are not eligible for the tax credit. Although these tests may use a systematic process they do not seek to resolve scientific or technological uncertainty.

It is possible that taking existing algorithms that are known to work in one context and applying them in a new context may be eligible as a core R&D activity. Testing or comparing the algorithms in the new context would however only be eligible if it involved resolving scientific or technological uncertainty.


Testing security protocols or arrangements

Security testing and security protocol testing are processes intended to reveal flaws in the security mechanisms of an information system. These terms generally refer to tests of existing systems and links. Such tests do not seek to resolve scientific or technological uncertainty and do not qualify as R&D activities.

Where there is a core R&D activity, testing the security arrangements and protocols may be eligible as a supporting activity if it meets the supporting activity requirements.


Converting existing systems to new software platforms

Activities where the purpose is to extend the life of, improve or renew a product or service by establishing it on a new platform are excluded. Such activities are ineligible for the tax credit.

Activities related to converting existing systems to new software platforms are often specific to a business. Therefore, the spill over benefits from resolving technological uncertainties related to such work are considered insufficient to justify the monetary risk to the Government of including such activities.

If such activities meet the definition of a supporting R&D activity they could be eligible for the tax credit.


Update on R&D tax credit legislation

The Taxation (Research and Development Tax Credits) Bill has been passed by Parliament and will become law when it receives Royal Assent. Inland Revenue will soon replace these draft guidelines with guidance which reflects the changes made in the Parliamentary process and the feedback which was received in time to be incorporated. When the updated guidance is posted the draft material will be removed, including the comments.

The functionality to comment on the guidance material will remain as it is intended to periodically update the material to reflect questions, comments and experience with the new R&D tax credit regime.

If you’d like to know more about the new R&D Tax Credits regime and how it might work for your company, contact the resources guys.