R&D Tax Credits are a great way to fund your development work. But what actually is HMRC’s definition of R&D? The answer is more complicated than you’d think.
Before you can claim R&D Tax Credits – an excellent and lucrative source of government funding – you need to work out whether your development work meets the HMRC’s definition of R&D for tax purposes.
But instantly, we run into a problem: HMRC’s definition can be extremely difficult to interpret.
What is R&D? The government’s version
The first thing to say is that HMRC gets its definition of R&D from the government.
To quote the Guidelines on the Meaning of Research and Development for Tax purposes, issued by the Secretary of State for Trade and Industry…
“R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.”
Straight away, you’re probably thinking to yourself that these two sentences aren’t the whole story.
‘Yes, but what is an advance in science and technology?’
And you’d be absolutely right. This paragraph is just the first two sections of the explanatory guidelines, which run to an astonishing 12 pages, each one packed with concepts, conditions and caveats.
The complexity of the government’s definition, while understandable, creates a big problem for UK businesses. Namely, it makes it difficult for them to know whether their projects actually qualify for funding. And where the eligible parts of their development work start and finish.
To address this problem, our tax credits experts have deconstructed the essential parts of the government’s definition of eligible R&D, and explained how you can apply it to your development projects.
If you have any questions, or would like to know 100% whether your business qualifies for R&D Tax Credits before you apply, just drop us a line. Our tax and technical experts can assess your eligibility for free and without any commitment to use our service.
Alternatively, take our R&D Tax Credits eligibility quiz, and we’ll give you an initial assessment of your eligibility in just 30 seconds.
What is R&D? The condensed version
Rather than reading all 12 pages of the government’s guidelines, take a look at our condensed version of the definition of eligible R&D.
R&D occurs when a company seeking a scientific or technological advance encounters and attempts to overcome scientific or technological uncertainties through methodical experimentation conducted by a competent professional.
We know. Even our condensed version is a little hard to follow.
So let’s make it more digestible by breaking down the four key concepts:
Now, let’s look at each of these concepts in more detail.
1. A scientific or technological advance
Companies conduct development work to achieve a specific objective. For example, to create a new product or service or to enhance an existing solution with unique features.
According to the government, companies perform R&D when they try to acquire the knowledge or capabilities needed to achieve this objective. This ‘acquisition of knowledge’ is the advance mentioned in the definition.
Per the government’s wording, this advance must be scientific or technical in nature. Learning how to repackage a product to appeal to new customers doesn’t count. Creating an original paint with a unique chemical makeup to give the package a distinctive colour, does.
This knowledge must be ‘new’. If the knowledge is publicly available elsewhere – in a research paper, for example – then acquiring it again doesn’t count as eligible R&D.
If another business gained the same knowledge but kept its methods private, then acquiring it again would count as ‘new’.
2. Scientific and technological uncertainties
A scientific or technological uncertainty is a point where your development team can’t ‘readily deduce’ how to proceed to achieve the advance.
An uncertainty is more than just a speed bump; it’s the end of the road. The point where you’ve reached the limits of your understanding. Where no prior knowledge or publicly available information – like that offered by technical manuals or online resources – can help your development team move forward.
If your company is genuinely pursuing an advance in its field – developing a brand new feature or tailoring a process for a different use – then it will probably run into an uncertainty quite quickly.
3. Competent professionals
A competent professional is someone at your company with significant expertise in the field in which you’re conducting R&D.
Their expertise may have been acquired at university or during an apprenticeship. Or possibly through working in the industry for several years. Either way, the key is it has to be extensive and relevant to your R&D.
For example, if you’re trying to make a new kind of beer, your competent professional would probably be a chemist with a background in brewing.
They wouldn’t be, say, a software developer who’s decided they want to try their hand at whipping up a new IPA.
You can read more about what a competent professional is and how to tell if you have one at your company, here.
4. Methodical experimentation
If a Competent Professional cannot deduce a solution to your scientific or technological uncertainty, there is only one way to move forward: Experimentation.
HMRC needs your experimentation to be methodical. You try one solution, record the results, gain insights, reassess, try another solution, and so on.
Unstructured experimentation and ‘stabs in the dark’ are not part of legitimate R&D.
Subscribe to GrantTree's Newsletter
To get all the latest news on R&D Tax Relief, grants, and other forms of innovation funding for your business, sign up to GrantTree’s newsletter!
4. Failiure is an option
HMRC’s definition of R&D says nothing about ‘success’.
That’s because a project doesn’t have to succeed to qualify for R&D Tax Credits.
Failure can actually help your R&D Tax Credits claim because it demonstrates that you encountered uncertainty.
Even if you did succeed, it’s important to show HMRC that you faced challenges during your development work.
Find out if you’re eligible for R&D Tax Credits
We hope that makes it easier for you to interpret the government’s definition of eligible R&D. And to apply it to your development work.
Remember, fitting the government’s definition of R&D is just one part of determining whether you qualify for R&D Tax Credits.
If you want to be 100% sure that you’re eligible – and find out how much you can claim, too – the best thing to do is speak to an R&D Tax Credits specialist like GrantTree.
Our team of tax and technical experts know R&D Tax Relief inside and out. They can tell you not only whether you qualify for the scheme, but also how much you can expect to earn if you file a claim.
Just drop us a line, and one of our team will be right with you.
