For companies, R&D tax relief is one of the most popular tax reliefs in the UK. However, the criteria for qualifying for the relief can be confusing for companies.
If you have ever considered claiming this tax relief, you may have asked yourself these questions:
"How do I know if my project qualifies for R&D Tax Relief?"
"What's the difference between commercial R&D projects and claimable projects for R&D Tax Relief?"
"What indicators can I keep a look out for to help my understanding as to whether I qualify?"
For companies, it can be confusing and frustrating when projects which you believed were nailed on to qualify for R&D tax relief do not. This is usually down to the difference between the commercial definition of R&D in industry compared to the definition outlined in the HMRC’s BEIS guidelines.
It’s through this blog post, that we will outline the difference between the two definitions and provide examples of scenarios which may qualify a company for R&D tax relief.
The general understanding of R&D within commercial industries
Let’s get the specifics out of the way first. What does the “R” and “D” mean within R&D?
Research: A detailed study of a subject, especially in order to discover new information or reach a new understanding.
Development: The process in which someone or something grows or changes and becomes more advanced.
So by using these definitions, you would expect that by researching the wider market for the best materials to developing a new solution, would indeed qualify for R&D tax relief. However, with R&D it is not so black and white; and more than likely this activity would not qualify for R&D tax relief.
How R&D for tax purposes differs
For R&D tax relief, HMRC outline key criteria which must be met in order to qualify for R&D tax relief:
Scientific or Technological Advancement
Scientific or Technological Uncertainty
Immediately, the necessity to fall within a scientific or technological advancement narrows the scope of companies which can claim R&D tax relief. Companies undertaking work in the arts, humanities and social sciences, including economics, also fall outside of the scope of the relief.
Where previously mathematical advances also fell outside of the scope of the relief, from April 2023 mathematical advances in themselves are treated as science for the purpose of the relief.
Scientific or Technological Advancement
In the guidelines referenced above, R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. Although this fits the definition of development supplied above, the guidelines continue to state that an advance in science or technology means an advance in overall knowledge or capability in a field of science or technology, not to a company’s own state of knowledge or capability alone.
This is the first distinct difference between the commercial definition of R&D and that of the meaning for tax purposes. This means that where a company has undertaken R&D only to the extent that they have increased their own knowledge to that within the industry, their project will not qualify for R&D tax relief.
Contrary to this, a claim can still be made for projects which sought to achieve an advancement but were unsuccessful.
Scientific or Technological Uncertainty
Further to the necessity for an advancement to be made to the industry, there must be uncertainty arising when attempting to achieve the advance. This criterion is broken down into two categories which must be fulfilled to qualify for R&D tax relief.
The knowledge whether something is scientifically feasible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field.
Let’s dive into these two terms a little further…
Not Readily Available
Not readily available means that the knowledge of how to achieve the advancement was not available in the public domain at the time of the project. This means that if another company in the industry has already achieved the advancement, if the knowledge of how to do so is a trade secret, then another company can claim R&D tax relief for achieving the same advancement.
Not Readily Deducible
Not readily deducible by a competent professional means that the expert working the industry could not easily work out how to achieve the advancement, necessitating extensive work to achieve the advancement and deduce whether or not it is feasible.
Keep in mind, the requirement for there to be a competent professional working on the R&D project is paramount, as they would have the necessary experience and/or qualifications to decide whether a development would fall within this qualifying R&D criterion.
Practical Examples
To help make sense of the technicalities, here are a couple of examples to bring this to life.
Example 1: Development of bespoke software functionality
Company A works within a niche sector of the fitness industry, for which they have built a bespoke app which allows users to book ‘day passes’ at gyms around the UK, built specifically for customers who travel often for work.
In building the bespoke app, it was necessary for the company to include booking functionality which would seamlessly book a day pass with the selected gym instantaneously.
The lead software developer was able to find open-source code on the internet which achieved the booking functionality sought and integrate it into the company’s bespoke software with relative ease. In order to finalise the development, the lead software developer made some user interface updates and tested the functionality. The code worked as expected.
This would not constitute an advancement within the industry and would not qualify for R&D tax relief, as the knowledge of how to achieve the development was readily available. If the readily available code did not work, which necessitated extensive iterative development work, this could lead to qualifying R&D activities.
Example 2: Development of a new concrete blend
Company B engineer and manufacture concrete for all types of industries. As market leaders, the company are always looking to continuously improve their products to offer a greater quality product to their customers and further improve the company’s trade.
The company sought to make improvements to their machinery which would improve upon their internal processes and create better cost efficiencies per product. The company considered whether they could introduce a new material within their proprietary blend to achieve this. In the industry prior to the project, there was insufficient knowledge of the material, or capabilities related to integrating it within the any concrete blend to achieve the company’s aims.
Building upon their wealth of industry knowledge through extensive designing, prototyping and testing, the company were able to finally achieve a solution after a lengthy 6-month development process. The new development has been shown to achieve a 30% cost efficiency improvement and has reduced the lead time for production by 20%.
This project would qualify for R&D tax relief, as an appreciable improvement has been made to the baseline knowledge within the industry as a whole as a result of overcoming technological uncertainty.
Summary
We hope that this blog post has demistifed the intricacies of research and development and what kinds of work would qualify for this valuable tax relief.
At Diagnostax, we have a team of dedicated R&D tax specialists who are on hand to assist with your potential claim, who have experience in making claims for a wide range of industries.
If you have any queries relating to R&D tax relief, or think that you may qualify for the relief, or are not sure if you’re eligible, then book some time in with our R&D Tax Specialists who would be more than happy to assess your project(s).