In this blog, Head of Research & Development Tax at Chiene + Tait David Philp uses specific sector examples to outline what does and does not qualify for tax purposes.
Research and Development (R&D) has a specific statutory definition for tax purposes, but what does this mean for companies that wish to apply for tax relief? To qualify for R&D Tax Relief, a company must be carrying out research and development in the field of science or technology. This can include creating new processes or products, make appreciable improvements to existing ones, or use technology or science to duplicate existing processes in a new way.
If you are:
- Working on something that hasn’t been attempted before,
- Making an existing product faster, cheaper and more reliable; or,
- You have found a more-efficient way to work
You will likely qualify for relief; the question is how much. It can be difficult to identify where a project starts and ends as determined by HMRC’s requirements. Below are some sector-specific examples of what elements of a project will and won’t qualify for the relief.
The Construction Company
The company created cladding which looked like ‘normal’ brickwork, but incorporated the capacity for offsite fabrication.
The cladding improved fire protection and suitability to fast-track production. Mechanical fixing, rather than wet mortar, provided strength and durability, which together with the all-weather construction made for significant cost savings.
The uncertainty of which materials should be used in the cladding system and the technological uncertainties surrounding the mechanical fixing were the qualifying R&D element.
The time spent pulling together information to patent the design was ineligible as the technological uncertainty had already been resolved. If the cladding system had been based on factory builds, and the company simply applied the technology to house builds, the project would have been ineligible as the advance in technology had already been achieved.
The IT Company
The company developed a software platform that integrated with various 3rd parties.
Each object on their platform had to be programmed to interact with all the surrounding objects. As the platform became more complex, more objects were introduced, and the amount of code required rose exponentially. The solution was to programme the properties of each object so that interaction was built-in to the functionality.
When the objects interacted, a separate code wasn’t needed because the inherent properties produced the outcomes. The qualifying expenditure on developing this innovative code qualified for R&D relief.
Whilst significant time was spent testing the code, testing that did not feed back into the design or development stages of R&D did not qualify for relief. In addition, time spent developing generic/simple code (improving the UI for example) is not eligible.
The Manufacturing Company
The company sought to build a lighter and cheaper engine than what was available off-the-shelf.
The work involved making the new engine substantially lighter, cheaper, and faster to produce than any currently available. As the project looked to make an appreciable improvement to an existing process, this qualified as R&D. It’s useful to note that, even if a secretive competitor had already built a new engine and made the same intended improvements, the project would still have qualified because the details of how this was achieved aren’t in the public domain.
Researching the baseline knowledge and capability in the field, and identifying a gap in the market for the company to exploit did not qualify, as this is prior to the R&D project for tax purposes. Minor and routine adjustments, such as incorporating slightly better spark plugs, already designed and used in another vehicle, did not qualify.
The Life Science Company
The company sought to develop a drug that reduced the risk of a stroke.
Creating a new drug, up to and including Phase III trials, was a qualifying project as it was attempting to overcome scientific uncertainties. The salaries of the scientists and their laboratory assistants doing this hands-on R&D qualified, along with consumable items used and transformed in the R&D process.
Time spent achieving important regulatory FDA approvals did not qualify, because any uncertainty in achieving these is part of the regulatory requirements, not science or technology.
The Food & Drink Company
The company sought to create a new recipe that reduced the level of sugar in a drink, whilst maintaining the same taste.
Time spent trialling and testing ingredients that feed into the development stage qualified for R&D relief. Ingredients wasted during this process also qualified as they were used and transformed in the R&D process, as well as time spent re-calibrating the machinery to successfully produce the new drink.
Market research to determine whether people preferred the new taste was ineligible as did not overcome a scientific or technological uncertainty, and did not feed back into the development of the product.