Within the world of R&D tax relief, there can be some confusion about what constitutes eligible work. While we’ve covered the basics before, we thought we should go into more detail about one of the thornier aspects of this: what’s the difference between New Product Development (NPD) and eligible R&D, and can NPD ever be eligible?
What is NPD?
While R&D and NPD can often be used interchangeably, there are some distinct differences between the two. New Product Development is the entire process of developing a new product, from initial market research, through design, development, manufacture, marketing, all the way to sales. It can be the creation of an entirely new product or a process to update an older product.
R&D, on the other hand, is the act of creating entirely new science, technology or technical knowledge and developing that into a saleable product. It often, but not always, constitutes the development phase of NPD. From HMRC’s point of view, only the part of R&D that involves seeking an advance in science or technology and overcoming technical uncertainty is eligible for R&D tax relief.
Can you have NPD without eligible R&D?
Yes! In fact, this is often the case. Much NPD involves tweaking or updating existing products, which can be done without any R&D whatsoever. You also see a lot of NPD that does require some R&D, but this R&D isn’t eligible. This is usually where the R&D doesn’t seek an advance or doesn’t involve significant technical challenge.
So, is NPD ever eligible for R&D tax relief?
The entire process of NPD is not eligible for R&D tax relief. However, within NPD, there could be eligible R&D, as long as this R&D meets HMRC’s eligibility criteria. The key thing when claiming for NPD projects is to focus in on the eligible elements and ensure that no costs are captured from any other phase of the project.
Can you give me some examples?
A great example of non-eligible NPD would be the case of a bakery switching from making cakes to making bread. Bread-making is an established science, and all of the information needed to do this is in the public domain. This means that, although bread is a new product for the bakery, there’s no eligible R&D.
Another example of NPD without eligible R&D is where the aesthetic appearance of an existing product is changed without the need for any underlying technical change. This would apply, for example, to new window designs that use established production techniques.
Mobile phone development is a good example of NPD with elements of eligible work. Each time Apple goes through a NPD process and releases a new iPhone, it’s likely that some eligible R&D will have taken place. However, only a fraction of the cost of NPD would be eligible and would reflect how much cutting-edge technology was developed to make the new iPhone possible.
At the extreme end, new products release in cutting-edge industries, such as robotics, are likely to have involved intensive R&D efforts, and, especially where prototypes or first-in-class items have been produced, a large proportion of the NPD cost is likely to be eligible for R&D tax relief.
As with all R&D claims, the key is to stay focussed, and help your client to focus, on the underlying advances in science or technology that made the NPD possible. Ask about failures, costs overruns, prototypes and technical challenges – if they can tell you about any of these it’s likely that eligible R&D has taken place!
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