Making an assessment as to whether the work you are doing qualifies for research and development tax relief purposes is not some kind of “dark art” – it just feels like this to start with because it’s unfamiliar to you.
The R&D guidelines state:
“For there to be R&D for the purpose of the tax relief, a company must be carrying on a project that seeks an advance in science of technology … through the resolution of scientific or technological uncertainty”. HMRC CIRD81100
This requirement is perhaps the most challenging, misunderstood and at times an opinion dividing part of R&D tax claims qualification criteria.
What does the definition of R&D for tax purposes mean?
The definition of R&D for tax purposes is drafted in such a way that no industry related specifics are given as to what’s in or out. This is deliberately so to ensure businesses can work out if, and explain how, their projects fit with the guidance.
Getting really clear on which aspects of your project satisfy requirements is much easier when you have a meaningful framework to help you gather thoughts and document rationales.
Articulating a meaningful framework for my clients to assess work for eligibility is really important. Whilst discussions evolve, they are always underpinned by these 3 pillars of eligibility assessment:
- Technological or Scientific Uncertainty
It works well, therefore, to organise your assessment framework into three steps that align with the above 3 pillars.
Step 1 - establish the existence and scope of “projects”
If you do not have a “project”, the work cannot qualify.
The definition of a project for R&D tax relief is based on the definition from the Oxford dictionary “a planned piece of work that is designed to find information about something, to produce something new, or to improve something.”
Create an initial vetting list
Start with brainstorming a list that includes any project (large or small) reliant on scientific or technological capabilities for the industry relevant to your business' commercial objectives.
The purpose of that business need is not important, it could be anything from solving a problem with service levels, business processes, data, security or scale for example, to creating something new for the business.
It does not matter whether the objective is looking to duplicate what competitors or similar industries have, or if you’re attempting to be first to market with a concept. It can be for internal purposes only or something for your customers.
Cast the net as wide as possible in your initial project vetting list.
Carve up that list - what types of projects are we looking at?
Next, ignore the commercial drivers for the projects listed and group the projects within each of these lists into the following categories, looking to capture the essence of “What are we trying to build/create?” interpreted at the project’s highest possible level:
- Creating a new or improved product, material, device, process or service.
- Introducing a new system - it can be a single stand-alone system or for larger business transformation projects integrate many subsystems. The point with something being “new” is that it is fundamentally different to existing systems within your business in the way it is organised, not necessarily what it seeks to accomplish. Interpret difference broadly because you do not want to knock something out too soon in the qualification process.
- Expanding or improving an existing system - it could include building or integrating new components or migrating to alternative products for one or more components of the system. Again, looking at the way a system and its components are organised and the scope of what the system can deliver in terms of performance and/or integration. If this work fits within the scope of a larger project (i.e. it is not a standalone objective), don’t include it again separately here.
- Introducing a new process, or improving an existing one, to the extent this is a stand-alone objective. If it fits within the scope of a larger project, don’t include it again separately here. E.g., in software focused projects, is data cleansing and migration processing a stand-alone initiative or is it intrinsically linked to another business improvement project?
If a project does not appear to fit in any of the above categories, create an “?” list. Consider whether it is truly stand alone or could be linked to another project (as a sub-project).
Step 2 - establish those projects where significant technological uncertainty is present
Without technological uncertainty, it doesn’t matter how innovative or expansive the advance in scientific or technological knowledge and capabilities is, the work cannot qualify. It is not enough to simply seek an advance in science or technology, if it’s easy to do within baseline knowledge and capabilities then the project cannot qualify.
Eliminate projects where there was no technical uncertainty
Next up is to whittle down this list through subsequent checks on the scientific/technical input and how this relates to “baseline” knowledge and capabilities in relevant fields of science or technology considered holistically for your industry. Importantly, consider this at the time you were undertaking the discovery work and iterative phases of work: planning, build, measure and iteration phases of a project.
Defining scientific or technological uncertainty for R&D tax relief purposes
In research & development projects, you will simultaneously build or create what is known whilst exploring what you currently don’t know.
The reason you don’t know something could be because:
- It's never been attempted before, or
- It has been attempted but there is no solution yet found, or
- Solutions offered (user groups/product owners/specialist or experts advice for example) do not work in practice for your specific project characteristics or performance/behaviour targets ... so you need to work it out for yourself a different way.
Scientific/technological uncertainty is present where you are exploring what you don’t know and there is:
- No obvious or available science based or technical solution “as is”
- Low confidence in achieving the scientific or technology objectives of a project development phase or collection of phases to deliver the scientific/technical solution
- Stretch goals set as part of the development to deal with unknowns – uncommitted scientific or technology objectives that are not fixed to move you closer to solving a scientific or technical problem or breaking through a scientific/technical barrier (not available “as is”)
- Multiple instances of failure and iterative cycles of planned development phases looking to persevere or pivot around a constraint, all because knowledge and/or capabilities “as is” do not deliver the scientific or technology objectives underpinning features, characteristics, behavioural etc. solutions sought
The scientific/technical development work undertaken in relation to the scientific/technological uncertainties must be:
- Challenging by reference to relevant expertise in your industry. Challenging means it is not already known, or readily deducible from publicly available information, how to achieve a scientific or technical objective. You will not be selecting from a list of possible options from known approaches. You will be coming up with an alternative and proprietary approach/method.
- Materially significant by reference to the new science/technical knowledge and capabilities created to meet the science/technical objectives of the development phase. You will be seeking to overcome a problem not yet solved by your industry that delivers something that was not at that time scientifically or technically feasible.
It follows that your business will employ or work with suitably qualified persons in the field of science or technology you are looking to develop – referred to for R&D tax relief purposes as “Competent Professionals”.
Beware, sometimes you will know that there are unknowns at the start of the project to be explored. For example, gaps in knowledge or available tech to create the features sought.
However, it is extremely likely that many other “unknowns” surface as part of the exploration, build and measure phases when things don’t go to plan because of unforeseen limitations or incompatibilities.
Key take away for scientific/technological uncertainty
The rate of change in research & development must be taken into account. Knowledge and capabilities growth within your employed experts, third part product owners and other development specialists that support products/tech/science in your industry are independently, but importantly simultaneously, resolving issues and pushing through barriers.
Your work to resolve an issue is only eligible if at the time you undertook the work there was no solution out there. This means that what is qualifying R&D today will not be qualifying R&D at some point in the future.
Applying this concept works both ways. Stop including project work at the point a solution for the problem is available (either through your own work or through the work of others once published in the public domain/released through a product owner).
BUT make sure you do not discount something that you are looking back on because at the time you consider the work a solution is available. If it wasn’t at the time include it, taking care to explain/evidence why it could not be known at the time you did the work.
Aspects of the project to assess in relation to technological uncertainty
Here are some questions to help focus your thoughts:
- What gaps did you identify and why is there a gap in scientific or technical capability?
- What were the scientific/technical objectives that the development team voted as low confidence in achieving – why did confidence lack?
- Which goals were stretch goals/uncommitted and variable? Why from a scientific or technical perspective were these considered as such? Why was it not sensible/economically viable to undertake a fixed commitment to achieving them?
- What scientific/technical concepts or objectives sparked greater discussion/planning/research? Did new ideas regarding a potential new method or approach to developing a capability emerge/be put forward? Expand on this to help understandings for a lay person.
- Were issues/constraints/failures encountered during build/measure phases? What were these? What was the science based or other technical barrier encountered? Why didn’t known approaches work? Why couldn’t thirdparty products/solutions/tech be introduced to overcome an issue in a standard way?
- How did feedback from failures shape ongoing development – pivot/work around, persevere, abandon, back to new design from new baseline level? Explain/demonstrate to aid understandings for a lay person.
If projects are realised without the presence of scientific or technological uncertainties that are significant and challenging to resolve then the project cannot qualify. Note however, that success is not a requirement, failure helps show how difficult the objective is.
I also want to raise the point around something being challenging and uncertain because of complexities due to size or inter relationships/interdependencies. If something takes a lot of time to plan and build, but you can use standard known approaches to do this; then even though there is complexity and uncertainty around whether or not it can work, if there is no new scientific or technical capability or knowledge being generated to do this, the project cannot qualify. Even if you are creating something unique that has never been attempted before - it will not qualify.
For projects that have met the requirements per steps 1 and 2 above, go on to step 3.
Step 3 - gather the facts to help articulate and demonstrate the advance
If you have a project and experience significant technological uncertainty in meeting that aim, then it follows that an advance in scientific or technological knowledge and/or capability can be extrapolated from all the collective facts. Facts gathered can help with articulating the advance to align with criteria set out in the BEIS guidelines.
Organising the assessment in this way seeks to ensure no time is wasted on gathering facts where all the elements required for qualification are not present.
Capture and demonstrate the scientific/technical impact of your work as an “advance” in knowledge and capabilities by reference to your industry as a whole.
When it comes to the meaning of R&D for tax relief purposes, we must look beyond the commercial outputs required, focusing instead on the significance of scientific/technical inputs within that project.
With the above context in mind, go on to the following tasks:
Possible approach to surface technical details to demonstrate the magnitude of “advance”:
- Define the features and behavioural outcomes sought to deliver something that is new or improved by reference to existing products, processes, materials, devices or services.
- Surface and focus on the underlying scientific and/or technological objectives, distinguish between features/behaviours noted above and scientific/technical objectives set to achieve them. It is this aspect that HMRC are interested in - the scientific/technical input not the commercial output!
Focus on the scientific and/or technical development objectives (phase by phase or collectively depending on the size of your project) that enable future features or outcomes, enhance or unlock the development progression, and achieve project milestones.
The scientific and/or technical objectives could relate to one feature/behaviour or more than one feature/behaviour. The science and/or technology objectives enabling a feature/behaviour may be worked on by a single team or more than one team.
For the scientific/technology objectives – a helpful way to organise facts is to document the following:
Quality – what is/are the scientific or technical attribute(s) sought that will enable a feature or behaviour?
Metric – how is this measured/what is the method sought/what is the scientific or technical input and output?
Target – what is the success level to achieve/what does success look like (scientifically or technically speaking)?
Constraint – what are the failures to avoid to maintain an economically viable or practically functional outcome?
Baseline – what is the current level (knowledge/capability) by reference to the above points? Why can’t the above scientific/technical objectives be implemented “as is”?
Working with a specialist R&D chartered tax adviser
The above information gathered at steps 1-3 will enable you to have quality exploratory discussions with your R&D adviser. The steps will help you and your R&D adviser gain clarity around qualification criteria so your R&D adviser can more robustly communicate this in a supporting R&D claim report.
Armed with a clear list of qualifying projects, you can then more effectively assess and determine how your work fits within the boundaries of R&D – the next stage in pulling together your R&D claim. See related article in this series - Boundaries of R&D for tax purposes.
Copper Tax collaborates with people in businesses, large and small (starting out or established) to put together authentic claims for R&D tax relief.
Working closely with the right people in your company, together we'll identify your qualifying projects and carefully link up associated expenditure to maximise the cash benefits of this tax relief with 100% compliance.
I'll help you understand the eligibility criteria and guide you through a way to assess your work against this. We'll look at the areas where you have incurred costs and how these costs can be attributed to the qualifying aspects of your work.
I'll take the facts we'll gather throughout the assessment process and produce a robust report for submission to HMRC in support of your claim.
Solely focused on R&D tax relief, this tax advisory service compliments the mainstream tax compliance services you buy elsewhere.