R&D according to HMRC
We’ve worked in the R&D Tax Credits space for the last 7 years so we have a fair amount of knowledge about what HMRC is looking for in R&D claims. And guess what? We’re going to share our insights with you.
In this blog post, we aim to shed some light on what HMRC means by R&D for the R&D Tax Credits scheme. Getting a grasp on these underlying criteria makes it easier to recognise when a development or manufacturing activity does or doesn’t qualify as R&D amid the continually shifting goalposts of what constitutes a scientific or technological advance.
The purpose of the R&D Tax Credits scheme
The UK government wants you to invest in R&D. They understand the role of scientific and tech advancement in boosting our economic growth and have put plans in place to encourage this.
R&D Tax Credits (accessed via the SME scheme or the RDEC scheme for large companies ) are a mechanism that the government created to financially incentivise UK businesses to undertake research and development work in the hope of advancing the fields of science or technology in some way. Importantly, this must be an advancement in the field of science or technology, rather than a company’s own internal understanding of how a particular system works.
An advance in technology (or science) consists of identifying the baseline technology (the baseline is the existing technical information on the subject that is available in the public realm) and then making an improvement to that technology to advance that baseline.
The core criteria for R&D
While many UK companies are doing development work on new projects that are technologically impressive and require extensive efforts to complete, the work must meet the government’s criteria for what constitutes R&D to allow us to claim for it under the R&D scheme. Let’s break it down here.
HMRC defines Research & Development for the R&D Tax Credits scheme according to three key points that should be satisfied in any claim:
That you are creating an advance in a field of science or technology,
That you took on technological uncertainty in pursuing that advance,
And that the route to the solution was not readily deducible by a competent professional in the relevant field.
The government defines a competent professional as someone who can look at the current parameters of a project and deduce how changes to those parameters will affect the overall system. If the effects of those changes, or the changes required to produce the desired outcome, are not readily deducible by that person based on their qualifications and/or experience in the field, the pursuit of those answers may qualify as R&D.
Applying these criteria to R&D projects
Remember that the focus is not on what you are doing, but how you are doing it. For example, designing a custom PCB (Printed Circuit Board) to run a custom electronic system will typically not be considered R&D since designing the PCB would involve the use of known methods and known materials. There is no advancement being made to the baseline technology in this case.
So what would qualify?
But, if you are building PCBs out of a new, untested material, or creating PCBs on the micro scale that has not been achieved before, that part of the project may qualify as R&D since there was no precedent for that material being used in that way, or PCBs working at such small scale.
The key outcome is that the new knowledge you create may open new opportunities for other technologies to be built on top of this new method in the future, which would support the continued advancement of science and technology that stimulates UK economic growth.
Will I have to publish my intellectual property?
You do NOT need to publish your intellectual property to qualify for the scheme. The fact that you achieved it confirms the viability of the new method, only your R&D agent will need to know the granular technical details of any relevant projects so they can form the application to send to HMRC.
I’m confused. Another example please!
To build on the above example: if you are using a known development framework to build a new software system, that work will not qualify as R&D (this is comparable to designing a custom PCB using known methods). But, if you extended that framework with custom code to generate a capability that it didn’t support before (comparable to building a PCB out of a new material), that aspect of the project could qualify as R&D.
Developing a new capability in this way should also involve at least some level of technological uncertainty, which is important as it satisfies another of HMRC’s criteria. This kind of uncertainty could be the fact that there was no documentation available in the public realm for how to achieve what you want to your objectives. This would support the notion of the work comprising some level of advancement to the baseline knowledge that had not been achieved before.
A project does not necessarily need to be successful for it to qualify for the scheme. The fact that companies are attempting these kinds of uncertain and risky development endeavours is the whole point of the government’s scheme, hence the financial incentive for attempting them. If the route to the solution was obvious at the outset (making success a certainty), the work would be unlikely to advance the fields of science or technology to an appropriate degree.
In short, if a competent professional faced technological uncertainty in attempting to advance a field of science or technology in some way, you may be able to claim a portion of your R&D expenditure back in the form of R&D Tax Credits, so get in touch now to chat through your options.
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