What Counts as R&D for HMRC Tax Relief Purposes?

R&D stands for ‘research and development’. It’s an exciting concept, all about innovation and creativity. R&D embraces new ideas and builds the technologies that will shape tomorrow’s market.

But from HMRC’s perspective, it’s a strict definition that requires careful consideration if you want to claim R&D tax credits for your work.

What is R&D?

R&D is based on people coming up new ways of doing things. Research and development is then needed to bring these ideas to life, by exploring what’s feasible and what isn’t.

There are three main types of R&D: basic research, applied research and experimental development.

Basic research is centred around gaining new knowledge in science or technology. It’s usually carried out by researchers at universities or other institutions, focusing on the theoretically possible.

Applied research takes the findings from basic research and looks to apply them in the real world. Though you’re not yet working on commercial solutions, applied research gets you closer to this stage through lab work and in-site validation.

Experimental development is the most common category of R&D, whereby companies take research findings and incorporate them into a product, service or process. This could be experimenting with existing solutions or starting from scratch, but ultimately, it’s commercial in mind.

What is HMRC’s definition of R&D?

There are two core ideas at the foundation of any R&D tax credit claim:

1. The work must seek an advance in science or technology
2. It must involve overcoming scientific or technological uncertainty

Qualifying Fields of R&D

You’ll note that the definition doesn’t specify any type of project or specific field; so long as your project is in science or technology, you could qualify. There are no specific commercial fields that qualify for R&D tax credits.

Sometimes, the field of the project won’t match the commercial field of the company. For example, if a large textile company begins a project to significantly improve the software technology behind their ERP system, the field of the project is in software development, not in textiles.

Companies in any sector can claim R&D tax credits, so long as the R&D project meets the requirements. However, there are some sectors that raise red flags for HMRC. For instance, a claim from a care home, a retail store or a taxi company would raise eyebrows, as it’s unexpected for these companies to be investing in advancing science or technology. Companies in these kinds of fields should be ready to defend their projects and potentially expect a compliance check.

An Advance in Science or Technology

Every project must attempt to further the knowledge and capabilities of the wider field. You should have a clear understanding of the existing state of the art and the possibilities in it and then be able to demonstrate how you wanted to go beyond this. Your advance in science and technology is more than just an improvement to your company’s processes; it should aim to go beyond the knowledge in the public domain.

You don’t need to completely reinvent the wheel or developing entirely new products and services. Appreciable improvements are also qualifying advances, so long as you can demonstrate how you genuinely advanced the technologies. Think extending the shelf life or efficiency of an existing drug or increasing the output of a mechanical process.

However, upgrades and customisation are not considered advances; HMRC is clear that advances must be deemed “non-trivial”.

There is one final opportunity for R&D, which occurs when you seek to replicate an existing solution in a new way. This is often the case when the “how” of a project is not in the public domain, as a trade secret, even if the results are widely available.

Scientific or Technological Uncertainty

The second part of this definition is about achieving your advance through uncertainty. Again, this must be in science or technology; HMRC’s support is not targeting commercial or business challenges. You need to show whether your project’s “competent professional” could easily work out the problem – if they couldn’t, you’ll likely qualify.

What kinds of R&D work qualify?

The most common sectors for R&D based on number of claims, according to their latest statistics, are:

• Information & Communication (26%)
• Manufacturing (26%)
• Professional, Scientific & Technical (19%)

These are by no means the only sectors for R&D, but are excellent places to start when it comes to identifying R&D.

Qualifying projects could include:

• A software company building an algorithm that no existing tool can replicate
• An engineering firm developing a new manufacturing process with an unknown outcome
• A pharma company testing a compound where clinical results are genuinely uncertain
• A food and drink company developing a new production method to reduce waste

For more examples of qualifying projects, check out this blog: Real-World Examples of Qualifying R&D Tax Projects

But for every qualifying project, there is an example of non-qualifying work. This includes routine development work, like customising existing software for new applications and maintenance and debugging, or commercial or market-driven activities, like cost reduction exercises using established methods or routine product improvements based on customer feedback.

Does the project have to succeed?

Short answer: no. You don’t have to fully achieve the advance in science or technology or achieve it at all to qualify.

So long as your project attempts to achieve that advance and does so by seeking to overcome uncertainty, you can claim.

For example, a company that seeks to increase the efficiency of a manufacturing process by 200% but only achieves an increase of 50% can still qualify. Similarly, a company researching the anti-inflammatory properties of a specific plant but that does not find anything of note also qualifies. The key is that both of these advances were clearly stated from the outset and the work towards them was documented.

In fact, projects with clear failures are easier to defend, as they show a clear uncertainty for the team. If you couldn’t actually resolve your uncertainties and achieve your advance, you have a strong argument for an unknown outcome.

How do you check whether your projects qualify?

Whether your projects qualify is a question you can only ask your technical team. They worked on the projects, know the problems faced and the goals of the work.

To get a rough idea of your qualifying projects, start with asking your experts the following questions:

1. What was the goal of the project? Did you aim to achieve something that hadn’t been done in your field before?
2. Did you have to go through trial and error because the answer was not obvious?
3. Could you have predicted the outcome from the start?

For more information on getting your technical team’s support, read our blog: How Can I Get My Technical Team To Help With Our R&D Claim Without Wasting Their Time?

If you’re still not sure, it may be worth getting in touch with professional R&D tax advisers. At Myriad, we offer a free consultation for your projects. If you’re looking for some validation for your innovative project, get in touch with our friendly team.