What does R&D actually look like in Proptech?

Ask many PropTech founders what “R&D” means and you will often hear a similar answer: something involving a laboratory, a patent or an entirely new invention. It is an understandable assumption, but one that may cause companies to overlook potentially qualifying software and engineering work.

The tax definition of R&D is broader than laboratory research. R&D arises where a defined project seeks an advance in the overall knowledge or capability of software engineering, artificial intelligence, data science, geospatial technology, electronics or another field of science or technology. The project must also involve scientific or technological uncertainties whose resolution is not readily available or deducible by a competent professional working in the field.

In PropTech, potential pockets of R&D may arise when companies are:

·       Developing platforms capable of processing property and asset data at levels of scale or performance that cannot be achieved using readily deducible methods.

·       Integrating legacy systems, third-party APIs and cloud services where a competent professional could not readily determine how the components should be combined to achieve the required function.

·       Advancing AI or machine-learning methods for document analysis, property-condition assessment or predictive maintenance.

·       Developing geospatial, digital-twin or BIM technology capable of reliably synchronising digital models with changing physical assets.

·       Designing smart-building hardware, sensors or communication methods that require the resolution of technological uncertainties.

R&D Tax Relief is a UK government incentive that rewards companies for undertaking genuine scientific or technological innovation, offsetting some of the cost of that work through Corporation Tax relief or a cash credit. The qualifying activities include technical analysis, architecture, scientific or technological planning, prototyping, experimentation, coding and testing. These activities qualify only where they directly contribute to resolving the identified uncertainties or fall within the permitted qualifying indirect activities.

The misconceptions that can cost companies money

Two common misconceptions may cause PropTech businesses to overlook qualifying development work.

The first is that only pure scientific or technological research qualifies. Software and engineering projects can also qualify, and the development of a new feature may contain identifiable pockets of R&D where it requires the resolution of qualifying technological uncertainties. The relevant test is whether the project sought an advance in the overall field of science or technology, rather than merely improving the company’s own product or capability.

The second is that using off-the-shelf software, third-party APIs or existing AI models automatically will likely rule a project out. It does not. Qualifying R&D may arise where existing technologies must be materially adapted, extended or combined to achieve an advance and the method of doing so is not readily deducible by a competent professional. Routine configuration and standard integration would not qualify, but development undertaken to resolve genuine system or integration uncertainties may do so.

A project does not need to succeed or qualify in its entirety. A larger commercial project may contain particular workstreams or technical challenges that meet the R&D Tax relief criteria, even where the wider product build does not. Failed experiments and abandoned approaches may also form part of the qualifying activity where they were undertaken within a project seeking the technological advance.

The practical takeaway for PropTech teams is not to dismiss work simply because it does not resemble traditional research. Where competent professionals encountered uncertainty that could not readily be resolved using existing knowledge and undertook technical analysis, prototyping or testing in pursuit of an advance, the work may warrant a detailed R&D review.

This is also where the risks lie. R&D tax relief has faced a wave of increased HMRC scrutiny in recent years, following a rise in low-quality claims and inexperienced advisers entering the space. Companies that self-assess or work with a partner who isn't equipped to prepare a robust, well-evidenced claim, can find themselves exposed to HMRC enquiries further down the line. Where a claim is found to be non-compliant, HMRC can claw back the relief already paid out, alongside interest and in some cases penalties, turning what looked like a cash benefit into an unexpected liability. Working with an experienced, compliance-first partner matters, not just to build a defensible claim from the outset but to provide dedicated support should HMRC open an enquiry.