If you’re looking into claiming R&D tax relief, the first thing you need to know is what is R&D? This article will explain what type of work qualifies for R&D tax relief. Most likely, you’ll be surprised how broad the definition is. Many clients find that some of the work they consider to be ‘business as usual’ actually qualifies for relief. So, read on to make sure you’re not missing out.
However, before we start, you can only claim R&D tax relief on behalf of an active company, registered on companies house, and subject to Corporation Tax. If that is not the case, there are other options for funding we can help you with – but you don’t qualify for R&D tax relief.
The basic definition is work conducted to develop a new product, process, or service, or to improve an existing product, process, or service. These don’t need to be laboratory-based developments, if you’re industry specialists (which most companies are) the likelihood is you could be conducting R&D.
However, this definition is quite open to interpretation. For example - companies make small adjustments to operations processes regularly – do these all qualify?
To sort the real R&D, from minor changes and improvements, there are three additional tests. If your work meets all these tests – it qualifies as R&D.
When you started your project – did you know how you would get to the end result? Or were you confident your proposed solution would work the first time around? If not – there was uncertainty in your project. The uncertainty is what your project is trying to resolve. That is the reason the R&D is taking place.
When you’ve been conducting your work, to try and get to your desired end result, you need to have learnt something. It may only be a small increase in knowledge. But that increase in knowledge is effectively the outcome of your R&D. Some examples of advances in knowledge are:
These kinds of advances in knowledge are the outcomes of your R&D. As specialists in your industry, these advances help to retain your company’s competitive edge. That’s what R&D tax relief is designed to encourage.
The final test is to ensure the advance could not have been made with a short conversation with an industry specialist. That might be a professional with significant industry experience, or technical qualifications that are relevant to your R&D. If they could have told you the correct solution to your uncertainty, as part of a short conversation, then your work does not qualify.
However - you’re unlikely to conduct time-consuming work on an R&D project if it isn't required, or could easily be resolved otherwise. This test helps to re-assure HMRC that the work was truly required, and so it needs to be considered when making a claim.
Here are some examples of types of work where the 3 tests are likely to be met.
There it is – just three tests and your work could qualify as R&D. Was there uncertainty, was there an advance in knowledge, and could it readily have been resolved by a competent professional. By considering these tests, you can determine if your work qualifies as R&D. If you think your work might qualify – get in touch to discuss how we can help you to make a claim.
If you’re interested in the full definition of R&D for tax purposes, they are published by the Department of Business, Innovation & Skills (BIS). The document is called the "Guidelines on the Meaning of Research and Development for Tax Purposes" and is available here.
And finally – if you want to find out more, check out our next article to find out what costs you can claim R&D tax relief on.
Find out how how companies can meet the deadlines for R&D tax credit claims and all the key R&D tax relief changes coming into place in 2023.
Costs involved in R&D are tax deductible and there are two ways in which R&D costs can reduce a companies Corporation Tax liability. Firstly – with the usual deduction of 100% of the cost from your companies profits. In addition, the R&D Tax Credit scheme allows a further deduction of 130% of eligible R&D costs, […]
Chancellor Jeremy Hunt has announced a series of changes to the UK research and development (R&D) tax relief regime, including a cut to the deduction and credit rates for the SME scheme, the R&D tax credit. The rate of the large company scheme, the R&D expenditure credit (RDEC) will be increased from 13% to 20%, […]