One of the greatest hurdles when people consider whether to file R&D Tax Credits is figuring out whether they qualify. Unfortunately, this is yet another area where it is difficult to give a clear answer.
Why giving a clear answer is difficult
In extreme cases, it’s easy to give a clear answer. Developing a cure for cancer obviously qualifies. Setting up a WordPress blog obviously does not. For everything in between, it depends on a number of factors, including presentation.
As an expert on the topic, when I try and pin down a clear answer, I hit against three barriers to do so.
The first is the regulation itself. Although it attempts to be clearly worded, it leaves a lot to interpretation. What is “technology”? Until that’s narrowly defined, “Science and Technology R&D” is a vast field, but the best that the regulation does is to narrow it down to “hard sciences” – i.e. engineering, biotech, physics, chemistry, etc, not forgetting, of course, computer science. Within these vast topics, what is “Technology R&D”? We’ll get back to that, but this is the first barrier: the regulation itself leaves a lot open to interpretation.
The second barrier is HMRC themselves, in their capacity as advisors prior to the claim being filed. Though they do their best to be helpful, they themselves are unwilling to draw clear lines beyond what is set out in the regulation. That is sensible, perhaps, since HMRC inspectors are not lawmakers and so their job is not to define the law but to carry it out. If you ring up HMRC to ask them if your project qualifies, you are likely to get a variety of answers depending on who you talk to. If your project obviously qualifies (e.g. you’re developing a new and complex technical device), then you’d get a straight answer. However, most of the cases we encounter fall in a grey area where the likely HMRC answer is “submit it and we’ll evaluate it when we see it.”
The third barrier is, again, HMRC – once they see the claim. You might think that HMRC’s rules are set in stone, since they are set by law, and HMRC in theory does not have the authority to change that law without parliamentary approval. But in practice, the law, as we saw in the first barrier, leaves a lot to interpretation. So what tends to happen is that HMRC’s application of the law varies depending on many factors: who you’re dealing with, what their understanding of your particular technical field is, how you present your project, and so on. Furthermore, HMRC’s internal guidelines also evolve over time (we are aware of ongoing internal discussions about what type of software qualifies, for example), which means that just because they accepted a claim this year doesn’t mean they’d accept a similar claim next year.
A futile attempt
Despite that, let me attempt to provide some kind of definition, some kind of thumb rule that you can use to figure out if you qualify, based on our experience and our understanding, as of July 2012.
The best way to do that is to break it down into a number of different criteria that each add or subtract from the case.
In R&D Tax Credits claims, HMRC is looking specifically for what they call “technical uncertainty”. If the project had a certain outcome, it’s probably not R&D. If the outcome was uncertain only because of your own lack of experience in the field, or for commercial reasons, then that’s still not R&D. The project should be uncertain because of technical reasons.
Who decides whether it’s uncertain? There, HMRC brings a mythical beast called a “competent professional”. As a competent professional in the field of software engineering, I call foul. There’s no agreed definition of a competent professional in this field, and there probably won’t be for many years to come. Levels of competency can vary by staggering amounts between people who are gainfully employed in the industry. If you define someone like John Carmack as the standard of a “competent professional”, then there’s almost no qualifying R&D going on in the UK. If, on the other hand, you take the average PHP sweat shop (yes, I have something against PHP) as your barometer of competency, then most of what IT people do qualifies.
So, it’s very difficult to pin down even this first point. What I would advise is to ask yourself: were there any aspects to the project where you weren’t sure if that component could be built to the required specification (requirements, performance, scalability, etc), or you weren’t sure what it might look like once built, because the technical constraints were unclear and had to be explored?
If the answer is yes, you may have an R&D project there.
If your project achieved a technical feat that no other project has achieved, then it is likely to be R&D. If it achieved something which few others have achieved, and if the knowledge of how they did it is not commonplace knowledge that the mythical “competent professional” would be aware of, then it could still be R&D. On the other hand, if what you’ve done has been done a thousand times already and is common knowledge, then it’s probably not R&D.
For example, downloading Insoshi (a social networking engine in Ruby on Rails) and setting up your own social network is not R&D. On the other hand, taking Insoshi, which basically represents the state of the art of publicly available knowledge, and heavily customising it and redeveloping fundamental components to match your specific requirements and scale it up, is probably R&D.
Cost is not an explicit criteria in the HMRC guidelines, but we find it helps to ferret out qualifying projects. Typically, something that cost £3k isn’t likely to be qualifying. On the other hand, if you spend £100k or more on competent software developers to build it, then chances are there was some technical uncertainty involved, because people don’t spend that kind of money to get something off the shelf.
That said, cost is not always a decisive factor. There are many companies that pay their developers/founders almost nothing (or, in some cases, exactly nothing), but are still performing qualifying R&D. So again, no clarity comes from this factor.
This is another half-criteria, but again, in some cases it can help. In software, in particular, much innovation is done by people with zero technical credentials. One of the best developers I know personally dropped out of school at 16, and yet he builds technically very complex products with skill and elegance.
However, if you do have someone with a PhD in Computer Science working on your project, then chances are they’re not just sitting around setting up WordPress templates (if they are, they won’t be for long!).
So, the “thumb rule” there is that if you have smart and competent people with significant formal qualifications spending a lot of time on the project, then it’s another hint that it may be R&D. If you don’t, though, that’s not necessarily a negative signal.
Ask a specialist!
I’ve done my best to explain the criteria, but ultimately, a final answer should be obtained from someone who knows these criteria inside out and deals with HMRC on a regular basis. Most specialist firms will tell you whether your project qualifies free of charge, so it’s definitely worth having a chat even if you plan to file by yourself.
That can be us or somebody else, but the point is, it’s free, so you might as well take advantage of it.
Generally, someone like me can figure out if a project qualifies in a few minutes. It’s an “I know it when I see it” type of thing, so it doesn’t even take that long.