Understanding what R&D activities qualify for tax purposes

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The additional information form (AIF) is now required for all research and development (R&D) tax claim submissions, as this provides the technical and financial information required by HMRC in a standard format. This has enabled HMRC to continue their increased scrutiny of R&D claims, with companies now being asked to provide further detail and justification for their projects.

It is important to fully understand what is required by HMRC before submitting a claim, and this insight article provides further details on a selection of commonly-used phrases.

What is R&D for tax purposes?

It is not enough that activity is innovative or new to a business, it must meet the definition of R&D for tax purposes. R&D is defined as taking place when a project seeks to achieve an advance in science or technology and applies to the activities which contribute to achieve this resolution.

What is a ‘project’?

The work that qualifies for R&D tax relief must be part of a specific project to make an advance in science or technology. The project must relate to the company’s trade, either an existing one, or one that it intends to start up based on the results of the R&D.

There cannot be a qualifying project before a plan or method to resolve identified uncertainties existed.

It is acceptable if a company did not see that resolving the uncertainty would be a scientific or technological advance until after it completed the project. The qualifying project does not need to have been successful; businesses can claim for the qualifying costs of an ongoing project, or of a completed but unsuccessful project.

What is ‘science’ and ‘technology’?

Science is the systematic study of the nature and behaviour of the physical and material universe. This does not include work in the arts, humanities or social sciences.

Technology is the practical application of scientific principles and knowledge, using the definition of science above. It includes applied sciences such as engineering or medicine.

What is an ‘advance’ in science or technology?

Just using science or technology to create a process, material, device, product or service, does not necessarily mean it is an ‘advance’ in science or technology for R&D tax purposes.

An advance must be for the entire field of science or technology, measured against information in the public domain, not just what a company knows or can do. In other words, when it is not clear how to achieve the goal and the solution cannot be worked out from existing knowledge without significant effort. Even if a particular advance has already been attempted by someone else or achieved but details are not publicly available (e.g., it remains a competitor’s trade secret), then efforts to achieve it may comprise an advance in science or technology.

Also, R&D may still take place even if a company’s activity fails and the advance it’s seeking is not achieved or fully realised.

Advances in science or technology normally fall into one of the following four examples:

  1. Extending overall knowledge or capability in a field of science or technology, i.e., new knowledge-based academic/ theoretical knowledge or capability. This can include adapting technology from another field.
  2. Creating a new process, material, device, product or service which incorporates or represents increased knowledge or capability in a field of science or technology.
  3. Making an ‘appreciable improvement’ to an existing process or so on, i.e., making it better through scientific or technological changes. This needs to be more than a minor or routine upgrading, which a technologist in the field would acknowledge as a genuine and non-trivial improvement.
  4. Using science or technology to duplicate an existing process in a new or appreciably improved way, e.g., which has the same performance characteristics as existing technology but is built in a fundamentally different way.

What is an uncertainty in science or technology?

Scientific or technological uncertainty exists when the knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily deducible (i.e., capable of being easily worked out) by a competent professional in the field of science or technology.

In other words, it is the scientific or technological questions that a competent professional needed to answer after they had tried without success to achieve the advance using their existing knowledge and available technology in the public domain. The potential resolution to these questions should take an extended period of time and not just be the next logical step.

Who is a competent professional(s)?

An important concept for R&D tax purposes is a ‘competent professional’ in the field because a competent professional can judge if a scientific or technological advance is needed to solve a particular problem. HMRC should give due weight to an opinion offered by competent professional(s) but further evidence may be needed.

A ‘competent professional’ is someone who is:

  • knowledgeable about the relevant scientific or technological principles involved in a company’s R&D;
  • aware of the current state of knowledge in that field; and
  • has accumulated experience and is recognised as having a successful track record in the field of science or technology.

In other words, a member of the technical team or an external adviser who has enough knowledge in the field of science or technology to recognise whether there is a need in the business for R&D in the first place.

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