R&D tax relief was introduced by the Government in 2000. Its aim is to encourage innovation in science and technology.
This doesn’t mean to say that R&D tax credits are only available to tech firms or those with laboratories. Most business sectors utilise science and technology in one way or another. For example, a farmer will use science in their use of feed and pesticides and an engineer will use science and technology in the development of tools and processes for individual projects. Many companies may tweak software so that it suits their purposes.
The only business activity HMRC highlights as being unlikely to qualify for R&D tax credits is work in the arts, humanities and social sciences (including economics).
For tax purposes, the definition of research and development is more complicated and for your R&D to be eligible for tax relief, HMRC requires more from you. To make a successful claim for R&D tax relief it is therefore essential to understand HMRC’s criteria for qualifying R&D. The following advice will help you to sort out the wheat from the chaff in your R&D.
Focus on the science and technology
To be eligible for R&D tax credits, HMRC requires you to have been seeking an improvement in science or technology.
Although it’s natural to focus on the product or service you’ve developed, you should consider instead what advance in science or technology your R&D project was trying to achieve. The intention is the essential thing. Even if your project failed, you would still be eligible for R&D tax credits if your aim to make an advancement is clear.
Even if your product or service is commercially innovative, an advancement in science or technology will have to be demonstrated. However, the R&D will still qualify for tax relief whether or not the end result proved commercially successful.
The importance of uncertainty
Equally important is the scientific or technological uncertainty your R&D project needed to overcome. What problems did you face to make the product or service a reality? What research did you undertake and what tests did you make to find out how to solve these problems?
HMRC insists the solution you achieved through your R&D could not have been provided through the help of a knowledgeable professional or ‘relatively brief conversations with peers’. In addition, the problem cannot be one already solved through work on similar projects in the past.
Proving the uncertainty was genuine
To help you identify which aspects of your project would satisfy a claim for R&D tax credits, try the following step-by-step procedure:
- Think about how you overcame the uncertainties. What analysis and investigations did you carry out?
- List the failures as well as the successes you experienced through the lifetime of the R&D. How did these affect the project as a whole? If you failed to solve a problem, consider the reasons why.
- Now consider whether your problem could have been overcome by an expert from outside the company. If so, your solution must already have been in the public domain. However, even if a rival firm has already overcome the problem you faced, they are unlikely to have made their solution public. Ask yourself whether your solution could only have been found through your own R&D.
- A manufacturer has a proprietary substance which they have used to make a product in the shape of a bowl. A new customer requires a similar product in the shape of a flask. Although they will have to create new moulds, the new shape does not involve any technical uncertainties not previously overcome. No R&D satisfying HMRC’s criteria would therefore be necessary. However, adding a handle to the flask would present new problems. How thin can it be made and yet still carry sufficient weight? What is the strongest and most efficient way to attach it? Will there be problems in the firing process? Because the substance is only made by them, no expert exists outside the company who could have given them the answers. The solution must be determined by R&D and this is likely to include a qualifying advancement in technology.
- A farmer introduces a new crop. He will have to consider the best place on the farm to grow it and, among other things, whether it will require additional nutrients. Other farms have grown the crop and made decisions about soil type, drainage and climate. But even in the unlikely event another farm exists with identical characteristics, the knowledge of, for example, which fertilisers they used will not be in the public domain. An element of trial and error will be therefore be necessary for a number of seasons to get the best yield. For this reason, the R&D is likely to be eligible for R&D tax relief.
Estimates suggest that 80% of businesses who engage in qualifying R&D fail to apply for R&D tax credits. So, if you still feel confused about which of your business processes would be eligible for a claim, you’re not alone. Speaking to an R&D tax credits consultant can be a big help, especially for your first claim. One of Easy R&D’s experts will help you to quickly identify all the qualifying activity in your business and will know the best way to present the information to HMRC’s inspectors. In this way, we will ensure your R&D tax relief is as rewarding as possible.
Where do you go from here?
Our team works in partnership with the leaders of SME businesses, guiding them through the five easy steps to a successful R&D tax credit claim:
- We’ll chat about your projects
- You upload the necessary information to our secure portal
- We analyse the data on your behalf
- We submit your R&D tax credit claim with HMRC
- HMRC reviews your claim and will notify either you or us if a repayment is due
We take care of most of the claim process, keeping client commitment to a minimum and maximising the claim value that can be received
With a single-minded focus on R&D tax relief and a diverse team of technical experts, we work hard for clients so they can put more back into their company.
Get in touch with our team for a free consultation and find out how you can claim R&D tax relief for your professional consultancy business.
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