We’re software developers, not accountants. So, this isn’t an article with answers. Instead, our thoughts might change how you think about accounting for software expenses.
In the same light, we also compare SaaS products with bespoke-built systems. Perhaps our thoughts will prompt a healthy discussion with your accountant?
What’s the big issue?
From what we understand, software expenses are generally considered ‘operational’ in accounting terms.
With the rapid growth of SaaS (software as a service), a rental model is commonplace. You pay monthly to maintain your functionality. And as your team grows you buy additional user licences. This, in turn, grows your SaaS costs.
For a fast-growing business SaaS can continually increase operating expenses. In turn, this can pull your operating margin down.
Now, let’s look at what some businesses do when opting for bespoke software.
Creating your perfect-fit software is a one-off investment. There are no monthly subscription fees and ever-growing licence costs. Therefore, many finance teams consider this a capital business expense.
Again, we’re techies. Always discuss your specific situation with an accountant.
Let’s say you can assign a bespoke software project to capital expenditure, removing it from operational expenditure. Not only can you amortise the expense over many years you improve your operating margin too.
Whilst 15-20% is considered a good operating margin, we’ve seen clients achieve 35% (and aspire to more). It’s not all down to software cost assignment, of course, but this clearly helps.
For businesses creating an exit strategy or seeking outside funds, a higher operating margin is especially attractive. It can impact your business value considerably.
This feels interesting to us. Not only does bespoke software make sense in terms of futureproofing your systems (a bespoke system will always scale as you grow) the one-off cost could have financial benefits for your accounting too.
R&D tax credits for capital expenditure.
Several Redox clients have successfully applied for R&D tax credits. For some, this became an additional benefit from bespoke software.
Your accountant (and specialist advisors) can advise you on whether to account for your software investment as capital expenditure, and whether you’re therefore eligible to apply for R&D tax credits.
We understand innovative technology is often eligible for R&D tax credits. It might be a new process or product, or the improvement of an existing one.
Your business must also meet certain criteria, such as employing less than 500 staff and turning over less than €100m.
Should your application be successful the benefits are clear. You can deduct an additional 130%* of your qualifying costs from annual profit (so, a 230% deduction in total), reducing your tax liability or creating a tax credit to receive.
Increasing the value of your claim, staffing expenses can form part of your qualifying costs. So, those man-hours your business used to scope and manage the project are all eligible.
It’s another reason to get your team actively involved in bespoke software projects. From our experience, the more they are, the more successful your project. You win on both counts.
Should you have potential to claim R&D tax credits on recent bespoke technology projects, speak to your accountant in the first instance. Specialist R&D tax credit advisors can also help you make a claim and Google highlights many such companies to approach.
*We understand the figure will fall to 86% in 2023.
Help to Grow: Digital UK.
Bespoke software investment doesn’t suit every business. Especially if you’re relatively new and still determining your likely growth. Thankfully, schemes exist to offer discounts on core SaaS software too.
One example is Help to Grow: Digital UK. Launched by the government in January 2022, the scheme provides advice and discounts for SMEs (employing 1 to 249) when purchasing eligible digital technology to boost productivity.
Businesses enjoy 50% discount on around 30 different CRM, accounting, and eCommerce software products. The scheme can also help you make the right choice for your business.
When you want to tentatively take the next step of your digital journey, Help to Grow: Digital UK makes mainstream SaaS products more affordable in your first year. It’s well worth looking into.
Software can achieve operational and financial goals.
Our insight confirms it’s not black and white when choosing the right technology for your business. Your primary goals might concern operational productivity and profitability gains through additional sales. Yet, your financial goals are relevant here too.
A one-off investment in bespoke software might make both operational and financial sense. This can be especially true when you’re growing fast.
You’ll stop SaaS costs bloating your operational expenses as your team grows and feel confident your systems will scale with you.
Whatever your technology needs, give your choice a 360° view before you commit.
Finally, always discuss the investment with your accountant. They might suggest a more cost-effective way of accounting for it or point you in the direction of financial support.