Introduction
How do you know if a project qualifies for research and development (R&D) tax relief?
The Department of Business, Innovation and Skills has issued its definition of R&D for tax purposes. This expands the definition as per UK GAAP.
What is the definition of R&D Tax Relief?
Research and development seeks an advance in science and technology with activities directly seeking the advance in science or technology through the resolution of scientific or technological uncertainties.
Let’s break this complicated definition into two simple parts.
- seeking an advancement in science or technology
- overcoming the scientific or technological uncertainties
Seeking an advancement in science or technology
We know the meanings of science and technology.
To understand the definition of R&D, we need to prioritise the understanding of the term “advancement”.
An advancement is typically groundbreaking innovation of science or technology that companies such as Tesla, SpaceX and Google are known for.
It includes the overall push in the field of science and technology with creating new products, processes and materials, by pushing innovation.
What is included in the definition of advancement is an appreciable improvement - This is important as many claimants fall into this category.
An appreciable improvement is developing something slightly better than what already exists, such as making something stronger, lighter, faster, smaller or cheaper (cost effective).
If a claimant company creates a product that is an advancement in science or technology, and a similar product is available in the market, but the product is protected by trade secrets, then the claimant would still meet the criteria of being an advancement.
Furthermore, the definition uses the words “seeking” an advancement. This means that the advance does not have to be achieved but an attempt is made to achieve it.
Projects that fail can therefore qualify.
HMRC wants companies to take risks by creating, designing and pushing innovation, which will create more jobs and boost the UK economy.
Demonstrating failure is great for R&D tax purposes as it shows HMRC that innovation was pushed.
Resolution of scientific or technological uncertainties
Again, we know the meanings of resolution, scientific and technological, but what is an “uncertainty”?
An uncertainty is not knowing if something is scientifically or technologically achievable.
This includes systematic uncertainties.
For example, a drone manufacturer wants to develop a drone that would fit into the boot of an average car and be able to carry 100kg for two hours from a single charge.
The manufacturer knows how to create a normal drone, but it does not know how to develop this appreciably improved drone. The uncertainties will be creating a small drone that is strong enough to carry a 200kg load and last for two hours on a single charge.
This uncertainty can be extended to software.
A business may want to improve its management processes by automating it. However, the existing legacy system is old and it does not have documentation so the developers have to reverse engineer the new solution to fit into the legacy system.
Not readily deducible
Another important aspect is that the project must not be readily deducible for a competent professional.
What does this mean?
A person that undertakes the R&D work must be a competent professional in the field and they must find the work difficult. This shows that the project is difficult for the professional.
If I, as a tax consultant, attempted to develop software, I would find it difficult as I am not a competent professional in software development.
