Software development is one of the most common sectors claiming the R&D tax credit in Ireland, and one of the easiest to get wrong. The credit is worth 30% of qualifying expenditure, rising to 35% for accounting periods ending from December 2026.
That's a meaningful sum on a development team's costs. But which of those costs actually qualify isn't always obvious. This is applicable to companies with multi-million euro software teams all the way to micro-companies looking to claim for their project management software.
Does your software project qualify as R&D in the first place?
Before any cost can go into your claim, the underlying work has to clear Revenue's science test. This is a bit more complicated when it comes to software projects, as the field is always moving and defining an advance can be hard.
Revenue is direct about this:
"For software development to be classified as R&D its completion must be dependent on the development of a scientific and/or technical advance and the aim of the project must be resolution of a scientific and/or technical uncertainty on a systematic basis."
This essentially means that building software isn't automatically R&D, even when it's technically demanding. Using a known methodology in a standard development environment, with the standard features of your existing tools, doesn't advance technology and won't qualify. Copying, upgrading, or adapting an existing product in a routine way doesn't either.
What does qualify is work that pushes past what's currently known: new software architectures, algorithms, techniques, or constructs, where a competent professional couldn't have told you the answer in advance. Agile methods like Scrum count as systematic, even though they don't follow the traditional linear software lifecycle.
A few phases inside a typical development cycle sit outside the credit even when the rest of the project qualifies:
- User acceptance testing aimed at confirming accuracy and completeness, rather than testing feasibility or capacity
- Work aimed at packaging a product for market where no scientific or technological uncertainty remains
- Adding features or functionality where there's no uncertainty involved
Claiming software licence costs
Your largest expense is usually staff costs or potentially subcontractors, but that doesn’t cover the entirety of the costs needed for your software project to take shape. Especially in software development, software and data licences form a critical part of your R&D project and could potentially significantly boost your eligible expenditure.
Revenue has no specific provision for software licences, but they do state that:
“The R&D tax credit is available in respect of expenditure incurred wholly and exclusively in the carrying on […] of qualifying R&D activities.”
Software licences can be considered overhead costs, which are eligible, so long as they are apportioned to only include the portion spent on R&D activities.
Apportioning costs means either working out or estimating the usage of an overhead on R&D. For software licences, many companies choose to apply the ratio of R&D staff time to non-R&D staff time to the software licence costs. Others may choose to apply the number of licences used by full-time R&D staff. Some software billing can even be tagged by usage. Whatever is the most accurate method for your usage is the most appropriate, so long as you keep records of your methodology.
Note: software licences which are capitalised cannot be claimed, as only capital expenditure for plant, machinery and buildings (fixed assets) are eligible. However, royalty payments are considered qualifying costs (unless they are paid to a connected party where that income falls under the Knowledge Development Box).
Cloud computing costs
Cloud computing costs, hosting, storage, compute, and the platforms your development runs on, are allowable where they're incurred wholly and exclusively in carrying on qualifying R&D. If your cloud spend covers both your R&D environment and your live production environment, only the R&D portion counts.
This is a provision that is specifically outlined in Revenue’s handbook, so ensure that your methodology for splitting costs holds up.
What software costs Revenue won't allow
A few costs come up often in software claims and don't qualify, however central they feel to the project.
Office rent is the most common one. Rent only qualifies where the space is genuinely integral to the R&D itself, like a specialised lab or clean room. A general office housing your development team, even one restricted to that team, doesn't meet this test. The office is where the work happens, but it isn't part of how the work happens.
Also excluded:
- Recruitment fees, insurance, travel, and equipment repairs or maintenance
- Telephone, bank charges, and interest
- Royalty or licence payments to a connected party where that income falls under the Knowledge Development Box
Key takeaways
- The science test comes first. Standard development work using known methods and existing tool features isn't R&D, no matter how much staff time it consumes.
- Software costs qualify to the extent they're used wholly and exclusively for R&D.
- You must apportion your software licence costs in a method that you can demonstrate to Revenue in an audit.
- Licences capitalised as intangible assets are ineligible, but licence payments are eligible.
- Office rent, general overheads for non-R&D, and connected-party royalties don't qualify, even when the team or IP involved is doing genuine R&D.
Sorting qualifying software costs from the ones that don't count is one of the more detailed parts of building a claim, and it's easy to either leave value on the table or include something Revenue will query. If you'd like help working through your project's costs, get in touch and we'll walk you through it.
