What is R&D for tax purposes?

A common question with a complex answer. When claiming R&D Tax Relief, your business must be performing eligible R&D activity – but what is R&D for tax purposes and what is eligible R&D activity?

What is R&D?

R&D stands for research and development. ‘Research and development’ are the activities a business undertakes to create new products, processes or services, or to improve existing ones.

What is eligible R&D activity?

For R&D Tax Relief purposes, HMRC has a definition of what R&D activities are –

“Activities that seek to:

• Achieve an advance in overall knowledge or capability in the field of science or technology, and;
• Resolve scientific or technical uncertainty.”

But what does that mean in plain English?

Let’s break it down!

“Achieve an advance in overall knowledge or capability…”

This means, you must achieve an advance in knowledge or capability at an industry level, not an advance in knowledge or capability to your business only.

A competitor may have already created something similar, but if how they achieved it is not common knowledge, your R&D to try to achieve the same is still eligible!

This could be interpreted to mean that your project must be successful and achieve the desired results in order to achieve an advance, however, the advance in overall knowledge could be that the approach you took doesn’t work!

“…in the field of science or technology”

This phrase causes a lot of confusion – many companies believe that because they don’t work in what they think is ‘science’ or ‘technology’, that they’re ineligible for R&D Tax Credit schemes.

This phrase actually means your field of expertise, your field of ‘science or technology’. Whether that be a field commonly associated with science and technology like biology, chemistry, materials science, or one less commonly associated such as manufacturing, food & drink, software development, or construction.

HMRC’s R&D Tax Relief guidelines do not have an exhaustive list of which industries are eligible – making the scheme purposely broad and inclusive of all businesses performing relevant R&D that is “related to a trade that the company carries on”.

“…and resolve scientific or technical uncertainty.”

The HMRC guidelines state that “Scientific or technical uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field.”

This means your project team should be scratching their heads and unable to find a solution that is already available to them. You cannot simply be repeating, adapting or copying an existing product, process or service.

It’s also important to note that incremental changes, improvements, optimisations and fine-tuning, that do not affect the underlying science or technology, are not eligible. If you’re aiming to improve a current product, process or service, you must be making significant scientific or technical advancements which have some uncertainty.

What is a competent professional?

‘A competent professional working in the field’ is considered someone that is knowledgeable in the relevant scientific or technological principles involved, is aware of the current state-of-the-art and has accumulated experience and a successful track record.

Not sure if your R&D activity fulfils the definition?

There is lots of jargon-busting to do when trying to define what R&D means and whether your project is eligible for an R&D Tax Credit claim. The easiest way to check is to speak to an R&D Tax expert, like us!

With approximately 75% of eligible businesses not yet claiming R&D Tax – helping a company to confirm their ability to claim is of upmost importance to us.

We’d love to help you identify your eligible R&D activities and build your claim. Get in touch with us to discuss your business, project and potential claim value.