R&D Tax Credits are a great way for your company to fund innovation by offsetting the costs of research and development. But what actually qualifies as R&D?
While you probably have a pretty good idea of what research and development means in a general sense, HMRC have a much stricter definition. They say that ‘Not all activity which may be considered to be R&D within the ordinary accountancy or commercial meaning of the term will necessarily be R&D for tax purposes.’ Their official guidelines list no fewer than 43 conditions that must be satisfied in order for a project to qualify. Here is an overview of the most important things to look out for when deciding what does and doesn’t count as R&D.
Scientific or Technological
Broadly speaking, HMRC define R&D for tax purposes as taking place when ‘a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty. ’ What does this mean?
There are four terms here that are especially important: Project, Advance, Overall knowledge or capability and, most importantly, Uncertainty. Misunderstanding what is meant by any one of these can be the difference between a successful application and a failed one. Therefore, it’s worth looking at each one individually to find out exactly what HMRC mean.
For a project to qualify it must contain a degree of uncertainty, meaning that its outcome can’t be clear from the start. This is good news in a sense because it means that your project doesn’t need to succeed in order to qualify. In fact, if success is guaranteed, it won’t qualify. Uncertainty is the lack of the ‘overall knowledge or capability’ that we mentioned before. It exists whenever ‘knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field.’ Again, the problem you are tackling can’t be one with an obvious solution. HMRC make it clear that ‘uncertainties that can readily be resolved by a competent professional working in the field are not scientific or technological uncertainties.’
They rule out ‘improvements, optimisations and fine-tuning which do not materially affect the underlying science or technology.’ You can’t just tinker with an existing idea, you have to overhaul it completely or come up with a new one.
HMRC also allow for the solving of ‘system uncertainty’ which occurs when the individual components of a system are well understood, but they way they interact with one another is not.
Project: a number of activities
According to HMRC ‘A project consists of a number of activities conducted to a method or plans in order to achieve an advance in science or technology.’ This project can involve several sub-projects as long as they’re all working towards achieving the same thing. A project can also be part of a larger commercial project, but only the parts of the project that address ‘scientific or technological uncertainty’ count as R&D. So, confusingly, a project can be several projects or a smaller part of a larger project. The key thing is to group together all activity that aims to solve the same uncertainty, and to leave out any related activity that doesn’t. Examples of such activity would be market research or advertising for an innovative product. These activities are related to the commercial side of the produce, but have little bearing on the actual innovation itself.
Advance in knowledge or capability
This is another one that seems self-explanatory but is actually more complicated. To qualify as R&D, a project must achieve ‘an advance in overall knowledge or capability in a field of science or technology (not a company’s own state of knowledge or capability alone)’. This means that you must do something that has never been done before, not just something that your company has never done before. The advance must have provable positive outcomes for the field as a whole. These can be either tangible, e.g. the creation of a new process or product, or intangible, e.g. the lowering of costs. HMRC are keen to point out that a project ‘does not become an advance in science or technology simply because science or technology is used in its creation.’ Just because a project ‘seems scientific’ doesn’t mean it counts as R&D. It has to genuinely push things forward.
Overall Knowledge or Capability
This is defined as ‘the knowledge or capability in the field that is publicly available or is readily deducible from the publicly available knowledge.’ That is to say, your project must go beyond what is conventionally understood and break new ground. Any advances you achieve will only count as R&D if they were not ‘readily deducible by a competent professional working in the field.’ If someone with a working knowledge of the area could have figured out your advance using common sense, it doesn’t count as R&D. HMRC also point out that it is possible for several companies to achieve the same advances independently and still qualify. A project also counts as R&D if it achieves an advance in knowledge or capability that has already been achieved elsewhere but was not made available to the public because it was a trade secret.
Don’t go it alone!
Hopefully we’ve given you a better understanding of what does and doesn’t count as R&D for the purposes of tax. However, there’s still a lot we haven’t covered. As well as making sure the activity you apply for counts as R&D, you’ll also have to provide detailed evidence of this activity. If you have any more questions about your R&D Tax Credits application, don’t hesitate to get in touch. We have experts on hand with decades of experience who can guide you through the whole process. We can even advance you 50% of the value of your claim within 48 hours.
Get in touch today and let’s get started.
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