Can you claim tax relief for failed R&D projects?
Updated: Oct 17
Failure is a reality of life, and the same applies to business. Failure comes hand in hand with innovation; it’s a by-product of learning and development. So to innovate is to take a risk. When a business starts an R&D project, they have no guarantee that the project is going to be a success. This is why R&D tax credits even exist, to incentivise businesses to take that risk.
FAILED R&D IS STILL R&D
R&D tax relief is not solely aimed at rewarding successful projects, it is intended to incentivise certain behaviour in businesses. The Government Guidelines on the meaning of research and development for tax purposes, clearly state:
"Even if the advance in science or technology sought by a project is not achieved or not fully realized, R&D still takes place.” (Paragraph 10)
Here are four points that businesses should consider if an R&D project they are working on fails:
Not all projects achieve the advance in science or technology they are seeking: As long as the project seeks to achieve an advance in science or technology and complete work to attempt to resolve the scientific or technological uncertainty, R&D applies.
Projects that fail can often be the most fruitful, from a learning perspective: The information from these projects is invaluable. The more a project fails, the more you learn and get closer to your goal of success.
If a project fails, keep a record of why: If it’s a technical reason make sure they raise this with you/us, and that we consider this when they come to claim.
If a project fails for business, commercial or legal reasons, it’s not a failed R&D project: A business still has to look at the advances sought, and the technical difficulties and challenges faced. Provided the project meets these criteria, they can claim, whether or not they achieved the intended outcome.
FAILED PROJECTS THAT CLAIMED R&D
SOFTWARE: Attempted integration of several systems for a bespoke enterprise resource planning system, where APIs were either not set up or of limited use. Significant time and effort went into trying to find a workable solution, but technical difficulties lead the project to be put on hold whilst other solutions were considered. The investment of staff time and external subcontractors had run to £120k and led to an R&D tax refund of £25k in total.
ENGINEERING: development of an adjusted process to reduce waste in the manufacturing process. The company manufactures car parts and was trying to find ways to reduce the waste materials produced in the production process. After trialing 3 different methods and testing new materials, no significant reductions in waste were available. The project was abandoned due to other business areas becoming prioritised when the market changed due to Covid. The in-house team’s time and some materials and tooling costs were incurred, which resulted in a tax credit refund of £55k.
FAILED R&D FOR FUNDING
An R&D Tax claim can be a very welcome friend, following the financial hit of a failed project, it takes the edge off the risk and enables further investment into innovation. It’s a great way for businesses to fund R&D projects and claw back the losses from failed work, so they can go again. If successful, R&D tax credits can provide businesses with the funding to kickstart further projects and enable a continuous flow of funded innovation. After all, innovation promotes more innovation.
YOUR R&D TAX RELIEF SERVICE
If you have clients that have been misadvised previously about the eligibility of failed R&D projects, they could be sitting on an R&D tax refund. For DTX’ers with a potential R&D Tax Relief client you’d like to discuss please book a scoping call here. Radish Tax by Diagnostax is a specialist R&D Tax Relief provider. Find out more about Radish Tax by Diagnostax.
Please note, as this blog was published prior to 1st April 2023, there is no reference to the changes which have been brought into place for the R&D tax relief schemes.
For expenditure on or after the 1st of April 2023, the following changes in rates of relief apply:
SME – the Enhanced Expenditure uplift rate has fallen from 130% to 86%; and the tax credit rate has fallen from 14.5% to 10% (exc. R&D intensive loss-making SMEs).
RDEC – the credit rate has increased from 13% to 20%.
Further, data and cloud computing costs can now be included within the claim qualifying expenditure calculation. Pure mathematics now falls within the scope of the relief.
For submissions on or after the 8th of August 2023, it is now required for an Additional Information Form to be submitted prior to submission of the R&D claim. For reference, please see our blog here.