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Your guide to R&D tax credits
Part 2 - Identifying qualifying R&D projects

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This is part two of our four part guide for accountants that want to develop their knowledge, grow their practice and provide their clients with R&D tax relief services. Companies can also use this to prepare and submit their own R&D tax credit claims.

The other parts cover:

Part 1 – What are R&D tax credits?

Part 3 – Allowable costs for R&D tax credits

Part 4 – How to claim for R&D relief

Definition of R&D

The definitions of research and development can be found within GAAP. According to FRS 102 they are as follows:

These definitions are probably what most people think when asked what is research and development. This is one of the reasons why many accountants do not identify qualifying R&D projects undertaken by their clients. Most of the work that our firm has got to date is the result of accountants failing to recognise R&D for tax purposes for their clients.

The definition of R&D has been modified by Guidelines on the meaning of Research and Development for Tax Purposes (issued by the Department for Business, Innovation and Skills). This is much more useful in helping accountants identify qualifying R&D. The definition is as follows:

  1. R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology.

  2. The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.

  3. Certain qualifying indirect activities related to the project are also R&D. Activities other than qualifying indirect activities which do not directly contribute to the resolution of the project’s scientific or technological uncertainty are not R&D.

The modified guidelines has a purposeful wide definition, enabling companies of all sizes and within all sectors to qualify for R&D tax relief. We will break down this definition to help accountants identify qualifying R&D activities.

Advance in science or technology

“R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology.”

The advance in the definition is expansive and it includes the following:

  • extending the overall capability or knowledge in science or technology (not only in the company’s own knowledge or capacity)

The overall knowledge or capability is:  

  • the knowledge or capability in the field that is publicly available or
  • the knowledge or capability that can be readily deducible from publicly available knowledge or capability by a competent professional working in the field.

This could include undertaking new research into developing human tissue and replacing damaged tissue in the human body. It could also be developing new materials such graphene.

These types of projects are usually huge and have a lot of funding. The companies that undertake this sort of R&D will have financial backing and will normally be clients of larger accountancy firms.

  • creating a process, material, device, product or service that incorporates an increase in overall knowledge or capability in science or technology.

Following the graphene example above, this could be creating new technologies based on the graphene such as LED, smart phone screen and solar cells.

  • making an appreciable improvement to an existing process, material, device, product or service through science or technology.

An appreciable improvement is when a company changes or adapts the scientific or technological characteristics of something to make it better than the original. It could involve making an existing product smaller, cheaper, faster, stronger, efficient etc.

As an example, a paint manufacturer may develop a paint, similar to its existing products, but this dries faster or has better waterproof qualities. Or it could be new software that is faster and more efficient than its competitors.

For medium and small accountancy firms, the majority of qualifying R&D projects would most likely fall into this category.

  • using science or technology to duplicate the effect of an existing process, material, device, product or service on a new or appreciable way. This means a product that does the same as another, but it is built in a fundamentally different way. It will also include adapting knowledge or capability from another field of science or technology, within the definition when the advance is not readily deducible.

The advance itself can be tangible or intangible. Examples of tangible advances include less waste production, creating faster drying paints, developing stronger and lighter materials. Intangible advances include creating new knowledge, reducing costs of production and faster production.

If an advance in science or technology has already been accomplished (or attempted to be) by another company and the details are not readily available as they are trade secrets, then a project to seek this advance can still qualify. This includes if a competitor is competing at the same cutting edge technology.

The definition includes “seeks to achieve”. This means that the project should attempt to achieve the advance and whether it achieves it or not is irrelevant from a tax point of view. Projects that have failed or are not yet complete therefore also qualify as an advance.

Projects that involve routine work do not meet the advance aspect of the definition, so would not qualify. Examples include developing basic WordPress websites, creating classic fire extinguishers and producing chemicals using typical formulations.

The definition of science is limited to the study of nature and behaviour of the physical and material universe. It excludes works of arts, humanities, social sciences, economics and mathematics (unless the math furthers science involved with nature and behaviour of the physical and material universe).

Scientific or technological uncertainty

“The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.”

Firstly we should clarify the difference between activities and projects. The project is the overall task of developing something, whereas the activities are the smaller parts of the projects, such as design, prototyping etc.

Although the project may meet the first part of the definition and qualify, costs only associated with qualifying activities within the project can be claimed. This means that not all activities within the project qualify. This is important when determining the staff time spent on a qualifying project. We shall cover this in the next blog.  

So what is the “directly contribute” as per the definition? To directly contribute, activities must attempt to resolve part or parts of the scientific or technological uncertainty in connection with the advance.

These activities include :

  • Brainstorming ideas, gathering technical information on the feasibility of the project
  • Managing the team, developing proof of concept
  • Creating model designs
  • Pre-testing
  • Prototyping
  • Field testing
  • Analysis of results and further development

It excludes activities such as:

  • Market research of commerciality  
  • Raising finance, negotiating contracts, researching regulations
  • Aesthetic design (not resulting in technological or scientific advance)
  • Production (will cover more in next blog), packaging

The definition also looks at “uncertainty”. Scientific or technological uncertainty exists when:

  • the knowledge of whether something is scientifically possible or technologically feasible or
  • the knowledge of how to achieve it in practice
  • is not readily available or not readily deducible by a competent professional.

Included in the definition of uncertainty is system uncertainty, which is a result of the complexity of a system rather than the uncertainty of how its individual components behave. The uncertainty could exist with the best way to combine these components to achieve an overall function or performance.

For example, in a remote control for a drone the characteristics of the components are known. The engineers know how each component works individually. The engineer however may not know if the components can be arranged in a different way to improve the speed of directing the drone, or by using different components they may be able to improve the distance the control can work.

Another example can be illustrated when developing software, where the developer knows the purpose of certain tools, but does not know how to combine the tools to make the whole system work more efficiently. This is usually the case for large software development projects.

It is inherent that uncertainty will exist when undertaking new scientific research or developing new or improved processes, materials, devices, products or services through new technology.  So you should talk to your clients when this type of work has been undertaken and check if they can claim R&D tax credits.

Projects that can be easily resolved by a competent professional or work that involves minor changes, which do not affect the underlying science or technology would not meet the uncertainty aspect of the definition and would therefore not qualify for R&D tax relief.

Qualifying indirect activities

Certain qualifying indirect activities related to the project are also R&D. Activities other than qualifying indirect activities which do not directly contribute to the resolution of the project’s scientific or technological uncertainty are not R&D.”

These activities do not directly contribute to the resolution of scientific or technological uncertainties but do form part of the project. These activities are as follows:

  • scientific and technical information services, insofar as they are conducted for the purpose of R&D support (such as the preparation of the original report of R&D findings)

  • indirect supporting activities such as maintenance, security, administration and clerical activities, and finance and personnel activities, insofar as undertaken for R&D

  • ancillary activities essential to the undertaking of R&D (e.g. taking on and paying staff, leasing laboratories and maintaining research and development equipment including computers used for R&D purposes)

  • training required to directly support an R&D project

  • research by students and researchers carried out at universities

  • research (including related data collection) to devise new scientific or technological testing, survey, or sampling methods, where this research is not R&D in its own right

  • feasibility studies to inform the strategic direction of a specific R&D activity.

Simplifying the definition

We understand that the definition of R&D is complicated and long winded. We have simplified the R&D definition into the following three points:

  1. Aiming to or achieving an advance in science or technology. The advance does not have to be blue sky innovation nor groundbreaking. It includes:  
    • making an appreciable technological or scientific improvement to an existing product, material, service, device or process. For example making an existing product smaller, faster, stronger, efficient, cheaper and so on.  
    • developing products, process or services that have been developed by another company but the development process is not publically available.  
    • failed projects that attempted an advance in technology or science.

  2. Overcoming technological uncertainties. A technological uncertainty exists when there is not an established path to successfully complete the project and technical challenges exist. For example, the process of successfully developing a product may involve development based on trial and error. i.e develop, test, analyse results, redevelop and retest.

  3. Must not be readily deducible by a competent professional. In practice, this is generally demonstrated by a project lasting more than 2-3 months.

The qualifying R&D activities start when work to resolve the scientific or technological uncertainty begins and the qualifying activities end when the uncertainty has been resolved or work to resolve it has ended.

To help you identify the more common qualifying R&D projects, these would normally include:

  • creating new or improved products, processes or services through technological or scientific resolution
  • improving efficiencies by reducing costs, improving service levels or winning more business through technological improvements
  • developing technology, software or tools for own use
  • experimenting with new equipment or production techniques
  • implementing technological changes to business to adhere to regulatory changes
  • undertaking scientific research

Once you have identified your clients qualifying R&D projects, you will need to ascertain the costs they can claim. We shall cover this in Part 3 – allowable costs for R&D tax credits.

I hope this blog was helpful. If you subscribe, we will send our articles to you via email. 

Feel free to send questions to ask@growthpad.co.uk.

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Tehsin Khan

Tehsin Khan

Tehsin is an experienced tax professional with ten years of experience helping companies and individuals save money. He has worked for the most reputable tax firms in the country before setting up GrowthPad. In his spare time, Tehsin contributes to national tax publications and to date has released three tax books.

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