How to identify qualifying R&D activities (part 4)

Question 1

You must have a qualifying project

Accepted Answer

HMRC have seen claims where a company may have made advances in science and technology, but not as part of a project to resolve identified uncertainties. No R&D relief was allowable in these cases.

HMRC will not agree with claims for the costs of work carried out that is not part of a qualifying project. It is not enough to discover an advance in science or technology during other activities.

There cannot be a qualifying project before a plan or method to resolve identified uncertainties existed. If you make a discovery outside of a qualifying project, you cannot claim for activities carried out to make that discovery. Work to develop such a discovery may be part of a qualifying project.

If you have already completed your work

It is acceptable to find that a qualifying project existed after you have finished working on it. You must be able to show the project existed at the time you incurred the expenditure and that it aimed to achieve a goal by resolving uncertainty.

It is acceptable if you did not see that resolving the uncertainty would be a scientific or technological advance until after you completed the work.

The qualifying work does not need to have been successful. You can claim for the qualifying costs of an ongoing project, or of a completed but unsuccessful project.

The difference between projects and qualifying project activities

Some companies confuse commercial projects with qualifying projects. This leads to an incorrect claim. A commercial project may involve many tasks in addition to activities qualifying as R&D for tax purposes.

It is important to separate other development activity from work to directly resolve scientific or technological uncertainty. It may be helpful to think of the attempt to resolve such uncertainties as sub-projects that may qualify for R&D relief. An identified sub-project may qualify for tax purposes. This does not mean that other costs incurred on the larger project qualify as part of a claim. Tax relief may be available for the costs of either:

activities directly aimed at resolving scientific or technological uncertainties
a qualifying indirect activity listed in paragraph 31 of the DSIT guidelines

Qualifying indirect activities do not directly contribute to resolving the identified uncertainty. However, they must still be carried out as part of the qualifying project or sub-project to resolve the uncertainty.

You need to define the boundaries of the project correctly. The qualifying project includes only the activities that collectively resolve the uncertainty. This separates qualifying activities from the work of any larger project and other activities of the business.

Examples of projects

Example 2.1

An engineer refines his working practices over time in the ordinary course of his incorporated business. His know-how includes advances in technology that are not publicly available or readily deducible to others in the field. They are his trade secrets. These incremental improvements to his ordinary working practices are not qualifying R&D activities. This is because they were not developed as part of a specific project seeking an advance in technology or the underlying science.

Example 2.2

A furniture company aims to design a particular piece of collapsible furniture. Most of the design work is routine. Unfortunately, the design brief (space and cost constraints, and specified materials) prevents the use of a standard type of fitting in one part of the design. No practical alternative is readily available.

The company begins activities seeking to develop a suitable fitting within the brief. They find the issue is not readily resolvable. No solution was readily deducible from existing public knowledge in the field or by the company’s qualified and experienced team. A technological uncertainty has been identified and a project is seeking to resolve it. This aspect of the work qualifies as an R&D project within the broader project. The work on the broader project does not qualify because the work was routine, not requiring any further advances in science or technology.

Example 2.3

An engineer working in a production plant applies her extensive experience and technical know-how to maintain manufacturing output, reduce downtime and introduce improvements at the facility. This work is part of her job, but the activities are not undertaken to achieve a specifically identified goal which is an advance in science or technology. Colleagues highlight some work as requests to the engineer and these are recorded on job sheets, but there is no specific project to achieve a qualifying advance. You cannot claim R&D tax relief for the costs of such activities.

If a work request developed into a project to resolve scientific or technological uncertainty, then that part of her activities may qualify for tax purposes.

The management team of the same production plant aims to operate with less waste and increased output. One part of this work involves the engineer agreeing new technical parameters for how the production line should operate. To meet these parameters, the engineer begins a project to design a new packaging tool which uses less material. As a competent professional, the engineer recognises that it is not clear how to do this, and that the new design requires an advance in packaging technology. Systematic trials are planned to resolve the uncertainty of if the new tool will work as intended.

The development work and trials are a project seeking to achieve an advance in science or technology. This is a qualifying project.

Example 2.4

The products manufactured at an oil refinery vary depending on the characteristics of the input crude oil. A particular catalyst suffers unexpected degradation when the refinery processes oil from different sources. Routine methods for managing these performance issues using alternative catalysts and by applying existing regenerative processes are not successful. The chemical engineering team then begin a project which has the aim of developing a new technological method and process to maintain the catalyst’s performance.

The new method and process are not readily deducible by the competent skilled team from their own experience or from existing technical literature. There are technological uncertainties to resolve. From the time specific uncertainties are identified, the activities are seeking to achieve an advance in a qualifying field of technology.

A series of steps are planned to resolve the identified uncertainties, this is a qualifying project. These planned activities include an initial investigation of how the performance of the catalyst changes over time. The knowledge gained from this activity is applied in the later steps of the project which focus on developing the new method. The initial investigation contributes to resolving technological uncertainty, directly contributing to achieving the advance. The development steps also directly contribute to the advance. These activities qualify for tax relief.

A potential solution to the problems is found. The team report on their progress and plan further development and testing to confirm all the uncertainties are resolved and the advance has been achieved. All these activities also directly contribute to the advance. This makes them qualifying activities.

Question 2

Qualifying science or technology

Accepted Answer

You must be able to show that your project sought to advance a qualifying field of science or technology. This must be an advance in the overall knowledge or capability of the field, not just an advance in the knowledge or ability of your company. HMRC have reduced the value of claims to zero where the field did not qualify.

Qualifying fields of science

A qualifying field of science studies the physical or material universe, such as physics, and applied sciences such as medicine. Work in the arts, humanities and social sciences do not qualify.

Work to advance scientific knowledge alone can qualify as R&D. For accounting periods beginning after 31 March 2023, mathematical advances in themselves are also treated as qualifying science.

Qualifying fields of technology

A qualifying field of technology is one that applies qualifying scientific knowledge for practical purposes. This includes fields such as construction or engineering. A project involving technology does not need to advance the underlying science but must seek to achieve an advance in the practical application of scientific knowledge.

Medical researchers, doctors and veterinarians may combine pure science and technology in their work. They have expertise of both:

the scientific principles involved
the practical application of scientific principles

Work in these fields may qualify as R&D.

Seeking advances in specialist applied scientific fields, such as computer science and sports science, may also qualify as R&D for tax purposes.

Using scientific or technological methods does not qualify for tax relief on its own

The goal of the project should not be ’readily available’ information. What is readily available depends on the context of the field. HMRC consider that if you can get information by routine means, such as using standard reference material, this would be readily available.

The use of technology to, for example, undertake routine surveys is not qualifying R&D on its own. Neither is time spent researching the answer to a question in standard reference material, however extensive and costly the research. These activities would only qualify if they directly contributed to the resolution of uncertainty. This must be part of a project to advance science or technology.

Examples of qualifying activities

Example 3.1

A construction company plans to build a high-rise structure on a given site. The ground conditions are not well understood. More information is needed to design the foundations. Extensive use of known surveying techniques and technology is needed. This is not qualifying R&D expenditure. This is because no advance in science or technology has been sought. Though technology is used to resolve an uncertainty and the company’s own knowledge is advanced.

Frustrated with the amount of time taken, the company starts a project to develop an appreciably improved method of survey. The company adapts, in a non-routine way, remote sensing technology developed for use in archaeology and combines that with data analysis software used in the oil industry. This improved method of survey is an advance on the current state of science or technology in the field of surveying. The planning and development of the new technique is a qualifying project. Once the company has resolved the uncertainty of how to create the improved method of survey, by showing the improved method works, the advance has been achieved. The qualifying work ends at this point, even if associated work continues.

Example 3.2

In the same construction project, a standard method of construction cannot be used because of access restrictions and the results of the ground survey. Research is carried out to find existing alternative methods, but none are suitable.

A new solution is needed which requires a technological advance in the field. A project begins. A temporary cantilevered structure, which has never been used for this purpose, is designed. Further technological uncertainties are identified during construction. These require the design to be adapted to be able to achieve the advance sought by the project. The planning and development of the novel structure and the extra work to overcome non-trivial uncertainties during construction are qualifying sub-projects.

Example 3.3

A semiconductor chip manufacturer sets out to develop a new family of microprocessors for use in portable electronic devices. This new range must meet strict operating parameters in all of the following:

energy use
speed
cost
size

The design must be optimised for wireless communication. This is a new industry design, and the large project is managed using a ‘stage gate’ process. Clear phases of research and development are identified within the process. This allows you to find boundaries of sub-projects qualifying as R&D for tax purposes.

Some activities within the sub-projects will not qualify and you cannot include their costs in a claim for R&D reliefs. These are activities that both:

do not directly contribute to achieving a scientific or technological advance
are not qualifying indirect activities

An example of an activity which would not qualify is the trivial adaptation of an existing communication protocol. This does not materially affect the design or function of the new microprocessor.

Question 3

Qualifying advances in science or technology

Accepted Answer

An advance in science or technology means an advance in overall knowledge or capability, not just in the company’s own state of knowledge or capability. You can adapt knowledge or capability from your field or another one to achieve an advance. This may qualify if the adaptation was not readily deducible to a competent professional.

The following examples of qualifying advances are illustrative. Qualifying for tax relief depends on the facts and circumstances of each project.

You may be seeking an advance to:

achieve physical results, such as creating a new product
achieve an improvement to a process
achieve new knowledge or capability

You may be seeking an advance to create a:

process
material
device
product
service

The advance must incorporate or represent an increase in overall knowledge or capability in a field. It must be an appreciable improvement, genuine and non-trivial. Paragraphs 23 to 25 of the DSIT guidelines set out the meaning of ‘appreciable improvement’.

You may be seeking to duplicate the effect of an existing:

process
material
device
product
service

You must be seeking to duplicate the effect in a new or appreciably improved way.

Activities that do not qualify as R&D include the routine analysis, copying or adaptation of an existing:

process
material
device
product
service

This applies even if the process is well planned and resource intensive. Such activities cannot be a qualifying project because they are not seeking to advance the knowledge of the entire field. This is true even if the knowledge or techniques are completely new to your company or your company’s trade.

Difference between working with technology and seeking an advance

The production of video games is an example of an area often thought of as creating something new in an area of technology. This does not necessarily mean that any of the work involved advances science or technology.

A project to create a video game may involve conception or acquisition of the ideas for the game, planning, scriptwriting, drawing and designing backgrounds and characters, creating animated sequences and soundtrack, and programming the result. None of these activities necessarily involve qualifying R&D for tax purposes.

If you develop video games or create animations for film or television, then it may be useful for you to also consider creative industry reliefs alongside R&D reliefs. You will not be able to claim under more than one scheme for the same activities.

Another example is software development. To claim R&D reliefs for software development, you must be able to show your claim is for a qualifying project seeking a scientific or technological advance in computer science or software engineering. Creation of new functionality and computer environments alone will not qualify for relief if it represents routine replication of existing methods in a new context.

If you think you may be able to claim for the costs of software development, you should first read our detailed guidance on when software costs may qualify.

Advancing a scientific or technological field

You can only claim for the costs of project activities that sought to achieve an advance in a qualifying field by resolving scientific or technological uncertainty. Paragraphs 13 and 14 of the DSIT guidelines define scientific or technological uncertainty for R&D. A qualifying project must seek to advance the knowledge or capability of the whole field.

Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically workable, or how to achieve it in practice, is not readily available or readily deducible by a competent professional working in the field.

Be careful not to treat ‘readily deducible’ as meaning ‘straightforward’ or ‘not requiring much effort’. A better meaning of readily deducible is ‘able to be worked out from existing knowledge without significant effort’.

Your company may be uncertain on how to resolve a specific uncertainty, but the work will not qualify if any of the following are true:

the issue is readily resolvable
the needed knowledge is readily available to a competent professional
the needed knowledge is publicly available outside your company

Take care not to confuse being innovative or on the cutting edge of your field with seeking scientific or technological advances. Innovation does not necessarily show that you are seeking an advance in science or technology.

Examples of advances in science and technology

Example 4.1

A food manufacturing company starts a project to develop a new kind of low-fat dessert. During product development, they find that the low-fat content of the recipe means that the product does not have a satisfactory shelf-life. The company’s food technologists are competent professionals in the field. They consider their own knowledge and publicly available information on food preservation technology. It is unclear to them how to modify the recipe and manufacturing processes to give a satisfactory shelf-life without adversely affecting the flavour of the dessert.

Competent professionals have identified that an advance in technology is needed. The company starts a sub-project to resolve this technological uncertainty. The sub-project activities qualify as R&D for tax purposes. The development work may include further sub-projects to resolve other qualifying uncertainties, but each sub-project must qualify for tax relief on its own merits.

Example 4.2

The same food manufacturing company starts a project to develop another new dessert. Significant research is carried out to ensure the product will be popular. The product goes through many iterations, varying the recipe to achieve a flavour profile and texture which focus groups like. The goal of the project is not to advance or improve science or technology, it is to adapt an existing process in a routine way (varying amounts of ingredients) to achieve a non-technological outcome. This is not R&D for tax purposes.

Additionally, flavour and texture are part of aesthetics. Aesthetic improvements can only qualify for tax purposes if an advance in science or technology is sought to achieve a particular aesthetic effect. The same applies to cosmetic improvements.

Example 4.3

Searching for the molecular structures of possible new drugs would be seeking an advance in science or technology. It applies existing knowledge of science (which compounds are known to cause physiological effects) in a search to resolve the uncertainty of which structures may lead to new or improved active compounds.

A project or sub-project to conduct such a search will qualify for tax relief. It will qualify even if the method used to search for those molecular structures, for example running a computer programme on a particular set of data, is itself entirely routine. The activity directly contributes to the resolution of scientific or technological uncertainty and so would qualify for tax purposes.

A project to identify new uses of existing compounds would also qualify, because it seeks new scientific knowledge about those molecules.

Read more information on applying the DSIT guidelines to pharmaceutical research.

System uncertainty

System uncertainty results from the complexity of a system and how its components interact, rather than uncertainty about how its individual components behave. Resolving system uncertainty as part of a project seeking an advance in science or technology can qualify as R&D for tax purposes. This is true even if the individual components did not require research and development.

The components of an electronic device, for example, may have characteristics which are understood but there may still be qualifying uncertainty about the best way to combine those components to achieve an overall effect. However, assembling components (or software sub-programs) to an established pattern is not qualifying R&D. Neither is following routine assembly methods. Such assembly involves little or no scientific or technological uncertainty.

There will be scientific or technological uncertainty in combining standard technologies, devices, or processes if a competent professional working in the field cannot readily deduce how the separate components or sub-systems should be combined to have the intended function.

When unoriginal work may qualify

Paragraph 21 of the DSIT guidelines gives examples of when there may be an advance in the overall knowledge or capability of the field despite the advance also having been achieved by someone else. These examples include where:

several companies are working at the cutting edge in the same field and are doing similar work independently
work has already been done but this is not known in general because it is a trade secret, and another company repeats the work
it is known that a particular advance in science or technology has been achieved, but the details of how are not readily available

Do not mistake routine analysis, copying or adaptation as qualifying for tax relief. Qualifying work begins when work to resolve a scientific or technological uncertainty starts and ends when work to resolve that uncertainty ends.

Examples of activities and when they may advance technology

Example 4.4

A company is aware that a competitor has developed a technique for processing very large quantities of data. The technique is an advance in the field. Unfortunately, this technique is still a trade secret. A project is carried out by the company to seek the same achievement independently. Because the original achievement is not publicly available or readily deducible, the work to replicate the achievement still counts as an advance in the field. The company seeking to replicate the trade secret can claim the qualifying costs of the qualifying project activities.

Example 4.5

A company wants to modernise its website. The company’s IT professionals determine that a natural language processing technique could be adapted to serve this purpose using readily available methods and techniques published in open-source communities. natural language processing has not been used as part of the company’s trade before.

A project was set up to deliver the work, but the goal of this project was to use or adapt existing knowledge in a routine way. It did not involve the resolution of scientific or technological uncertainty involving an advance in overall knowledge and capability in a qualifying field of science or technology. The costs of this work are not R&D for tax purposes.

Example 4.6

A company develops software intended for the analysis of market research data. Market research is not a qualifying field of science or technology.

This is not qualifying R&D unless the software development work seeks to achieve a scientific or technological advance of the entire field of computer science or software engineering.

An algorithm would not be qualifying R&D as such unless it extends overall knowledge or capability of algorithms themselves. Work to adapt such algorithms to analyse, for example, customer spending patterns would not be qualifying R&D for tax purposes.

Question 4

Qualifying activities

Accepted Answer

R&D tax relief is for the cost of qualifying activities, not necessarily for the cost of the whole project.

Qualifying activities are those which either directly contribute to the resolution of the scientific or technological uncertainty or which meet the definition of qualifying indirect activities. To qualify, an indirect activity must be listed in paragraph 31 of the DSIT guidelines.

Not all costs of qualifying activities are qualifying expenditure. More information on qualifying expenditure is available in R&D tax relief: categories of qualifying expenditure.

Qualifying direct activities may include many things done to resolve the scientific or technological uncertainty including:

planning, but only planning to resolve the scientific or technological uncertainty
scientific or technological design, testing and analysis undertaken to resolve the scientific or technological uncertainty
activities to create or adapt software, materials or equipment needed to resolve the scientific or technological uncertainty, provided that the software, material, or equipment is created or adapted solely for use in R&D
other activities directly aimed at resolving the uncertainty

Paragraph 28 of the DSIT guidelines provides examples of activities which do not directly contribute to the resolution of scientific or technological uncertainty.

To find the costs of a qualifying project seeking an advance, you must be able to identify:

exactly what scientific or technological uncertainty it was trying to overcome
how you planned to resolve the uncertainty
the steps that were taken

Only then can you show which activities directly contributed to resolving the uncertainty.

There must be a direct link between the work to resolve the uncertainty and the activities you are claiming as R&D.

Remember to apportion costs of qualifying activities in a reasonable way. If an engineer only spends 50% of his working day directly working to resolve the uncertainty, then you can only claim for the cost of that 50%.

When identifying and apportioning costs for both direct and qualifying indirect activities, you should:

use an evidence-based approach
identify evidence the expenditure was incurred
be able to explain the basis upon which costs incurred in resolving the uncertainty have been identified or apportioned

For large business customers, any sampling used to arrive at costs for R&D purposes should be agreed with your Customer Compliance Manager (CCM) before you prepare your claim.

Qualifying indirect activities

The list of qualifying indirect activities is found in paragraph 31 of the DSIT guidelines. Indirect activities must fall under one of the activities on this list to qualify for R&D tax relief. These qualifying indirect activities must also be part of a qualifying R&D project.

Check each entry on the list to see if an activity qualifies. For instance, under paragraph 31b, you can claim for administrative and other support staff who work to directly support a project. An example may be specialist cleaning staff needed for the project.

You cannot claim for support work that would have been done anyway, like the normal costs of managing payroll. The reason for incurring such general overheads is not because the project exists.

Examples of indirect activities

Example 5.1

Your company’s in-house IT team makes a business-critical update to the IT communications systems. This update involves no R&D activities. All staff use the IT systems, including a team carrying out qualifying R&D activity. HMRC will disallow any costs of this update treated as expenditure on the R&D project.

HMRC does not accept the argument that such an IT update contributed to resolving scientific or technological uncertainty as part of a qualifying R&D project. Qualifying indirect activities must both be listed in paragraph 31 of the DSIT guidelines and be part of a qualifying project.

Example 5.2

You want to securely share confidential information as part of a qualifying R&D project. You engage staff to develop and maintain a bespoke in-house app for this purpose only.

The software development of the app itself involves no direct resolution of technological uncertainty, so the costs are not claimable as direct R&D.

However, the relevant staffing costs of developing the software are claimable as indirect activities, under paragraph 31(a) of the DSIT guidelines, because they constitute ‘scientific and technological information services, insofar as they are conducted for the purpose of R&D support’.

Example 5.3

A construction firm has begun a R&D project to develop new additives that improve the performance of 3D concrete printing. Trials are undertaken on a construction site to test the feasibility of the process outside of the laboratory, and to address further technological uncertainties.

General security patrol the site which includes the trial area. The general site security costs cannot be claimed as qualifying indirect supporting activities. This activity is too remote from seeking the advance to be considered a part of the project. No part of the general site security costs can be claimed as qualifying indirect activities as they are not undertaken for the qualifying R&D project.

However, additional security personnel assigned to protect trial equipment and materials for the purposes of the qualifying R&D project can be treated as qualifying supporting activities under paragraph 31b of the DSIT guidelines.

Example 5.4

A company is developing a new type of sun lotion that provides protection for longer in extreme temperatures. The facts show that this project qualifies as R&D for tax purposes. The company has bought a new machine specifically for testing potential products.

The machine needs to be continually tuned and maintained. Activities associated with this will meet the definition of qualifying indirect activities under paragraph 31c (maintaining research and development equipment used for R&D purposes).

Unfortunately, the company does not have anyone with the required skills. The company’s human resource team hire trained staff solely to maintain the machine. The maintenance activities of these staff qualify as indirect activities under paragraph 31c of the DSIT guidelines. Those activities of the human resource team that relate to hiring the new staff to maintain the machine do not qualify as R&D. HMRC considers the human resources (HR) costs of hiring staff who undertake qualifying indirect activities to be too remote from seeking the advance to be considered a part of the project.

Read the guidance for more information on R&D costs you can claim under the small and medium-sized enterprise scheme and the Research and Development (R&D) expenditure credit scheme.

The merged R&D expenditure credit (RDEC) scheme and enhanced R&D intensive support (ERIS) replace the old RDEC scheme and small and medium-sized enterprise (SME) schemes.

Both schemes apply to accounting periods beginning on or after 1 April 2024.

ERIS is only available to loss-making R&D intensive SMEs. Your relevant R&D expenditure (plus that of any connected companies) must be at least 30% of total relevant expenditure (plus that of any connected companies).

You may be able to claim the higher rate of tax credit of 14.5% under the old SME scheme in an accounting period ending before 1 April 2024. This claim must be on expenditure incurred on or after 1 April 2023. You must have met the intensity condition in that period. The intensity condition is that your relevant R&D expenditure (plus that of any connected companies) must have been at least 40% of total relevant expenditure (plus that of any connected companies).

Question 5

Identifying the boundaries of the project

Accepted Answer

HMRC sometimes must reduce the amount claimed because the project boundaries have not been correctly drawn. The activities of the qualifying project must directly contribute to achieving an advance in science or technology by resolving scientific or technological uncertainty or be a qualifying indirect activity contributing to the same goal, see paragraphs 33 and 34 of the DSIT guidelines.

It is important to know when project activities start to qualify for R&D relief and when they will stop qualifying. This is to ensure that you clearly identify which project activities qualify, and which activities do not. Only then can you work out the qualifying costs for your claim.

To find the boundaries of a qualifying project:

Identify the start of the project to resolve a qualifying scientific or technological uncertainty.
Identify which project activities directly contribute to achieving an advance in science. or technology by resolving scientific or technological uncertainty.
Identify any contributing qualifying indirect activities listed in paragraph 31 of the DSIT guidelines.
Identify where work to resolve the qualifying uncertainty ends.

Once you have identified a scientific or technological uncertainty, qualifying work will begin when you start working to resolve it as part of a project. Remember that a project consists of a number of activities conducted to a method or plan in order to achieve a goal. The qualifying work will end when you have achieved the advance you seek or when the work to resolve the uncertainty ends.

If a competent professional working in the field can readily resolve an uncertainty, then it will not qualify as an uncertainty for tax relief purposes. Improvements, optimisations, and fine-tuning which do not materially affect the underlying science or technology will not qualify either. Your costs for such activities cannot be included in a claim.

You must separate commercial uncertainty from scientific or technological uncertainty. You may have sought to resolve scientific or technological uncertainty when creating a new product, but that uncertainty will usually end when you have developed a working prototype.

Resolving commercial uncertainties such as finding a market for the product do not contribute to resolving scientific or technological uncertainty, any such activities do not qualify for tax relief.

Examples of project boundaries

Example 6.1

A company owns a professional sports team. They want to know how to improve player recovery time through diet. Their nutritionist has appropriate qualifications. She has also worked in laboratory research to advance sports nutrition. This competent professional in the field identifies the need for scientific advances.

The company starts a project to achieve the specific scientific advances. Monitoring devices are fitted to players before routine training sessions. The training staff add the monitoring data to a spreadsheet and email it to their nutritionist. The nutritionist uses the data to progress her research project. This directly contributes to the resolution of scientific or technological uncertainty. The activity of fitting the devices and the activity of organising and emailing the data are qualifying R&D. The training session itself does not qualify because it is not an activity undertaken to resolve specific scientific or technological uncertainties.

Example 6.2

A company carries out market research to learn what technical and design characteristics will make a new wifi system appealing. This activity does not qualify as R&D for tax purposes.

The company sees potential in creating a device incorporating improved wifi range. The company’s R&D staff are competent professionals. They see this improvement as a genuine and non-trivial advance in the field. The project will seek to develop an appreciably improved device, which is an advance in technology.

The company creates a detailed specification for the new product and decides on a development plan.

Some parts of this work involve planning for activities that directly contribute to resolving the project’s technological uncertainties. This includes the system uncertainty associated with developing technology to prevent interference between components. These parts of planning form part of the qualifying project, as do the activities directly contributing to the advance.

Other parts of the planning focus on activities such as obtaining intellectual property protection or cosmetic design decisions. These activities will not directly contribute to resolving the project’s scientific or technological uncertainties. Nor are they qualifying indirect activities. Neither this planning nor these activities qualify as R&D for tax purposes.

The project continues beyond the planning stage. The qualifying R&D ends when the activities that directly contribute to achieving the advance in technology through the resolution of scientific or technological uncertainty end. In this case, this is when a final prototype is produced and tested which has the essential characteristics of the desired wifi system.

Creating copies of the prototype and market testing of the product will not be qualifying R&D. These are activities that do not directly contribute to the resolution of scientific or technological uncertainty, neither are they qualifying indirect activities.

Example 6.3

A new company is set up to manufacture caravans. The company begins work to build a prototype of a new model of caravan. There was no plan to undertake research and development because the design only called for existing technology and materials. This is not qualifying R&D for tax purposes.

Testing shows that the industry standard fireproofing applied to this prototype will not be safe enough to meet tough new rules in the target market. There is no suitable or readily adaptable fireproofing method in existence. The company starts a project to resolve the technological uncertainty of how to fireproof the prototype. This project aims to develop a new fireproofing solution that will be an advance in the field. The identified technological uncertainty was how to achieve improved fireproofing. Only work to achieve the advance in technology, started after the uncertainty was identified, can be qualifying R&D. As soon as the uncertainty is resolved, qualifying work ends. The company cannot claim for the entire work of designing and building the caravan.

Later, the company makes minor modifications to the design of the caravan. This work will not be qualifying R&D if these modifications do not materially affect the underlying technology.

Example 6.4

A company decides to investigate development of a new type of appliance to automatically pick goods in a distribution warehouse to fulfil orders. The device must be compatible with a range of existing object sizes, shapes, and storage solutions. It must also have some means of adjusting for the delicacy and weight of each object to pick up items safely. The appliance must also identify when and how it is safe to move and to drop the goods.

The highly qualified company engineers working on the project are competent professionals. They identify some technological uncertainties that must be resolved. The engineers recognise that any solutions would be advances in the whole field.

The engineering team begin work to outline a high-level plan to resolve these technological uncertainties. At the same time, the marketing department seek the views of potential customers.

The costs of the project planning activities of the engineering team will be qualifying R&D because they were directly aimed at resolving the technological uncertainties to achieve the advance, but the research activities of the marketing department will not qualify.

Testing

Testing may be performed for many reasons, including to:

confirm or disprove a hypothesis
show a product works in practice
meet regulatory or other certification requirements
achieve statistically relevant results in a scientific context

Claims for costs of testing are allowable when tests are needed to resolve scientific or technological uncertainties of a qualifying project. This includes to enable empirical observations relating to a hypothesis.

Testing that takes place after the uncertainties have been resolved will not qualify for tax purposes. For example, obtaining regulatory certification for a product which already has proven functionality does not qualify as R&D.

If certification requires further advances in science or technology to materially improve functionality, then the activity aimed at achieving those advances will qualify as R&D.

Examples of when qualifying activity ends

Example 6.5

A chemical manufacturing business aims to improve an engine oil additive product to be compliant with future emissions standards. This requires an advance in science or technology.

The scientific and technological uncertainties identified are how to include new combinations of chemicals and how these will interact to improve performance. A project begins to resolve the uncertainties and seek the advance. Development includes laboratory experiments and batch testing in cars during small scale trials. The project ends when an improved product is ready to be scaled up for factory production.

The planning and development stages following the identification of the uncertainties are a qualifying project.

Work to scale up to factory production in this example is not qualifying R&D because competent professionals identify no technological uncertainties in preparing for factory production.

Example 6.6

In the same company, routine quality testing shows the new product is not performing as expected. The engineering team of competent professionals are uncertain why. A qualifying project begins to resolve this uncertainty as part of seeking an advance in knowledge of manufacturing technology.

The engineers suspect the problem begins when the chemicals are combined. They need to adjust the manufacturing process on an industrial scale to test potential solutions.

The engineers schedule trials over 20 days using the production plant. Each day they collate and analyse the results. After 12 days of testing, they find a method that resolves the problem. They use the remaining 8 trial days to fine tune the new process.

They resolve the technological uncertainty on day 12, when they solve the problem.

The project activities that directly contributed to resolving the technological uncertainty over those 12 days are qualifying R&D. Note that lost production is not an activity and so will not qualify for R&D tax relief.

The remaining 8 days are fine tuning and further testing to meet manufacturing standards. These activities do not qualify for R&D tax relief, they had already resolved the technological uncertainty. In this case, the fine tuning and further testing were not aimed at creating the type of appreciable improvements described in the DSIT guidelines.

Question 6

Bringing the concepts together

Accepted Answer

Example 7.1

Task

A biomedical engineering company wants to create a new bio-active stent for medical use. Company engineers and medical experts identify the functional characteristics of the device and aim to use existing knowledge for the design. A project begins, the aim of which is to develop the stent as part of their product line. They complete a study to understand known stent designs and carry out computer modelling to test the design the company wants to use. No work to resolve technological uncertainties has started. Identifying the requirements of the new stent is not qualifying R&D because at this stage there is no project which seeks to achieve an advance in science or technology.

Identification of technological uncertainty

The project team of skilled engineers are competent professionals in the field. After evaluating the initial work, they find that the proposed stent would not work effectively for the target patient group. This is because existing knowledge in the field does not allow the stent to be manufactured thinly enough whilst keeping the required structural strength. The stent will need to be structured differently from current designs to be able to deliver drugs to the patient effectively. There is no routine, generally known, or readily deducible way to create this structure. This is technological uncertainty. The specific uncertainty identified is how to create an ultra-thin bio-active stent with a suitable drug delivery structure for this patient group.

The team needs to achieve an advance in technology to overcome this uncertainty. They find that this will be a genuine and non-trivial appreciable improvement on current stent technology. It will increase the knowledge and capability of the field of biomedical engineering as a whole.

The start of a qualifying project

R&D for tax purposes begins when the project seeks to achieve the identified advance in science or technology. It may be helpful to think of this as the start of a qualifying sub-project of the wider work.

The team carry out a further review of current technologies and test existing materials. They do this to understand how they might use them in the novel design. This work is qualifying R&D, even though it may be routine and uses known methods. This is because the work is directly for the purpose of gaining knowledge and understanding to be specifically used in overcoming the identified technological uncertainty.

The team leader begins to plan the project activities from concept through to making a final prototype. The planning activities are part of the R&D project. This is because they directly contribute to resolving the identified technological uncertainty.

The team leader also works with the finance team to secure funding for the project. They then work with marketing colleagues to plan how to profit from the new stent. These activities do not directly contribute to overcoming the uncertainty, so are not part of the qualifying sub-project.

The project team work together over a period of five months, creating a progressive series of prototypes. The time spent by these employees directly on this work is qualifying R&D. These qualifying direct activities include further computer modelling and the development of new materials to include in the design.

Time spent on qualifying indirect activities during this period will be qualifying R&D if they contribute to seeking the advance in technology as part of the project. Indirect activities, such as preparing weekly reports of research results and carrying out feasibility studies, support the qualifying sub-project. These activities qualify for tax relief because this activity is both part of the qualifying sub-project and is listed under paragraph 31(a) and 31(g) of the DSIT guidelines. Time spent training staff to use new HR software being adopted by the company during this period is not for the purpose of the qualifying sub-project. The time spent does not qualify for relief.

A specialist engineer with relevant expertise is recruited specifically for the project. Their role is to directly work on achieving the advance in technology as part of the qualifying sub-project. The time on this recruitment by the team leader of the project can be a qualifying indirect activity, but the activities of the corporate HR team to support the team leader do not qualify. HMRC consider the support provided by the HR team too remote from seeking the advance to be considered a part of the project for tax purposes.

An existing employee of the company sources materials for all projects. The time they spend on acquiring the materials for use in the qualifying sub-project will qualify as R&D for tax purposes. These activities are both part of the project and qualifying indirect activities under paragraph 31(c).

The end of a qualifying project

After five months, the team test a functional prototype. It shows the desired characteristics of the final device. The technological uncertainty has been resolved. At this point, the qualifying sub-project has ended.

Further work

The wider project continues, and the project team spend six months testing the device to meet regulatory requirements. This testing is not qualifying R&D because it does not seek to resolve scientific or technological uncertainty. The company does not identify any scientific or technological uncertainties in developing the manufacturing process, so the planning and carrying out of manufacturing do not qualify as R&D for tax purposes.

A later model of the stent may need a new technological advance. R&D for tax purposes may begin again if activities of another sub-project begin which seek to achieve an identified advance by resolving scientific or technological uncertainties.

Be careful to only include expenditure on activities that directly contributed to resolving the uncertainty, or on activities that both form part of the project and are listed as qualifying indirect activities in paragraph 31 of the DSIT guidelines. In the above example, the time the project lead spends managing the specialist engineer for the purposes of the qualifying project may qualify, but the costs of the HR department in supporting this line management will not.