One of the things that can be really difficult when assessing a client’s R&D is working out whether it is truly a ‘new’ development. In this area you’re generally at the mercy of the competent professionals, and it can be tricky to work out what to ask them to be sure that those projects meet HMRC’s criteria. To help, here’s our guide to what you need to analyse and understand to be able to demonstrate to HMRC that your client is doing something new!
Establishing the baseline
Establishing the baseline is absolutely key to demonstrating that an R&D project has produced something new, so it’s very important that you a) understand what is meant by the baseline and b) know what to ask your client so that they can work with you in establishing where the baseline is.
So, first, let’s think about what HMRC means by the baseline of an R&D project. Simply put, it is ‘the baseline in technology that any advance sought is being measured against’. HMRC also point out that ‘An advance in science or technology means an advance in overall knowledge or capability in a field of science or technology, not a company’s own state of knowledge or capability alone.’
From this, we can see that claimant companies are obliged to research what was possible in their industry at the start of the project and show that the advances that they made go over and above this. Most companies will do this as a matter of course – they’ll spend time researching whether anyone else has been able to achieve something at the start of a project so as not to waste time or money on doing unnecessary R&D.
Over and above establishing the baseline capabilities of the industry at the time of starting the project, you also need to demonstrate that how to achieve the advance was not readily deducible. By this, HMRC means that the knowledge required to achieve the advance was not available in the public domain. The public domain part of that is very important, as it allows for companies to claim for work done to achieve advances where the knowledge required is a protected trade secret, for example.
So, what’s the best way to establish whether something was readily deducible? Do an internet search first of all – if you can’t find any information on the internet then that’s a really good sign that the knowledge isn’t publicly available. Beyond that, checking trade journals and scientific papers can also tell you whether there is any published information about this advance.
What to ask your client?
For all technical aspects of the claim, you need to rely on the competent professionals to help you understand the project and why it was carried out. When thinking about the baseline, it can be very helpful to discuss with your client why they needed to embark on the project. If the initial work of a project assessed current capabilities in the industry and demonstrated that the advance could not be achieved without doing R&D, that’s great – they clearly understand the baseline and have done work to go over and above it!
Questions like ‘what could your main competitors do before you started this project?’ can be very fruitful – it can pull your client away from thinking about their own company and start them thinking about the industry as a whole.
However you get there, making sure that your client has understood and advanced the technical baseline of their industry is vitally important to the success of an R&D tax claim!