‘But my company doesn’t do any R&D…’ A phrase we hear on a regular basis, and one which may well be the case. However, it’s our job to ensure that the companies we talk to understand what is Research and Development in the context of tax relief and here we set out some points to be aware of.
We certainly wouldn’t encourage companies who aren’t doing any innovation which falls within the government guidelines to put in a claim for tax relief.
Since its introduction in 2000, R&D tax relief has slowly increased in terms of uptake – the most recent figures show that £2.9bn was claimed in 2015/2016, up from £2.45bn in 2014/15. However, this amount was claimed by only 26,255 companies and HMRC believe the relief is significantly under-claimed. For SME’s, £100 spent on qualifying R&D costs can generate tax relief of up around £25 – is this something your company can afford to miss out on?
One of the most difficult areas for potential claimants to get to grips with is whether or not their company is undertaking R&D in the context of the HMRC guidelines. Confusingly, the definition used by HMRC is different to the definition for accounts, commercial or engineering purposes.
The definition used by HMRC is that R&D takes place when there is a project which seeks to achieve an advance in science or technology through the resolution of scientific or technological uncertainty.
What does this mean in practice?
Project – fairly straightforward, this means activities conducted to a plan – something more than ad hoc.
Advance – the advance must be for the whole of that particular field, and not just the company catching up with the state of play. It’s helpful to be specific about the field of advance e.g. mechanical engineering. The claimant must have ‘competent professionals’ in that field i.e. an expert in mechanical engineering, perhaps qualified through many years’ experience in the field.
The advance can take four forms:
- pure white coat, extending the overall level of knowledge in that field
- creating a new product or process incorporating technological advance
- appreciably improving a product or process through technological advance
- duplicating the effect of an existing product or process in fundamentally new way
Science and Technology – science is defined as the ‘study of the nature and behaviour of the physical and material universe’ and technology as the practical application of scientific principles and knowledge. It’s important to note that development work in the arts, humanities and social sciences are not within the definition of science and technology.
It is crucial to distinguish between the use of technology and the improvement/development of technology. Using existing technology to address new commercial products is NOT R&D, the underlying technology must be advanced. It’s helpful to think about not what is produced, but how it is produced.
Uncertainty - uncertainties are the crux of the claim. Is something scientifically possible or technologically feasible? If it is, how is this achieved in practice? If, however, your competent professional can easily solve the uncertainty, then this is a routine uncertainty and not a scientific or technological uncertainty for tax purposes.
What is Research and Development? - in summary
Where does this leave us? Hopefully, you can see that R&D doesn’t just mean white coated staff working in laboratories – companies undertaking development work in design and engineering, where this involves overcoming technological problems, can just as easily meet the qualifying requirements.
For a comprehensive list of criteria, download our R&D Tax Credits eligibility checklist. It will take you less than 10 minutes to determine whether or not you can claim.
We work with our clients to ensure that qualifying R&D projects are identified and claims optimised. This previous article sets out some examples of the range of industries where we have helped companies make successful claims. If this is something you would like to discuss, please do not hesitate to contact us.
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