When you ask your clients whether they think they do R&D, you’ll always a variation of one of two answers – ‘yes, loads’ or ‘nope, I don’t think so’. Unfortunately, both answers are often wrong when it comes to claiming for R&D tax relief! HMRC’s strict criteria around what constitutes qualifying work for R&D tax relief claim are often at odds with your client’s definition of R&D work. For example, clients that claim they do lots of R&D can find that their projects are classed as ineligible optimisation, and clients that think they don’t do R&D can suddenly find themselves with a large claim for efficiency improvements they have made. Happily, WhisperClaims leads you through these criteria one step at a time, enabling you to quickly and easily assess your client’s projects for eligibility.
So, what work does qualify for R&D tax relief? You’ll need to consider two things – is the work a project according to HMRC, and, if it is, does the work qualify?
Project definition for R&D tax relief
HMRC define an R&D project as a ‘number of activities conducted to a method or plans in order to achieve an advance in science or technology’. They also state that a project ‘may be part of a larger commercial project’.
So, what does this mean for your client and their tax claim? Essentially, they must have planned their work and have set out to achieve an advance (more on advances later!), rather than just doing day to day work and stumbling across it. Of course, by this definition, the discovery of penicillin would not be eligible!
You also need to make sure that, if your client’s project is part of a larger commercial project, they are only claiming for the costs of the R&D project. Just because a commercial project involves R&D, it doesn’t make commercial activities eligible!
The last thing to remember is that the projects need only have been active during the financial year being claimed for, so projects that started before or finished after this period can still be included in the claim.
So, once you’ve established that your client has projects that meet HMRC’s definition, you need to work out whether the work is actually qualifying work for R&D tax relief. The main criteria are that the project sought to make an advance in science or technology, and that the work involved some level of technological uncertainty. Let’s look at each of these in turn:
Seeking an advance in science or technology
So, what is an advance in science or technology? It’s as simple as it sounds – the outcome of the project represents an increase in overall knowledge, however small, in an area of science or technology. However, applying this to the work done by a company can be more complicated. Happily, HMRC lists four areas of activity in which a company might seek to make an advance, and are therefore eligible for R&D tax relief.
- work that seeks to extend overall knowledge in a field of science or technology;
- work that seeks to create a process, material, device, product or service which incorporates an increase in overall knowledge or capability in a field of science or technology;
- work that seeks to make an improvement to an existing process through scientific or technological change;
- work that seeks to duplicate an existing, material, device, product or service in an improved way using science or technology.
From these definitions, you can see that anything from the discovery of a unifying theory of everything, to producing sliced bread more efficiently could be considered eligible, if they involve some level of technological uncertainty.
What is technological uncertainty?
Simply put, a project has technological uncertainty if your client was unsure at the outset whether it was possible to achieve the desired end result. This usually involves some level of both commercial and financial risk, and experienced staff scratching their heads!
Your clients must also be comfortable that the advance sought is for the industry as a whole, and that the information on how it might be achieved was not available in the public domain. This does mean that if another company has achieved the advance, but how they did it is a protected trade secret, your client can still claim for work involved in replicating their competitor’s advance.
In conclusion, if your client can show that their project goes beyond applying existing technologies and demonstrate that it breaks new ground, they should be able to claim R&D tax credits!!
Helpfully, HMRC provide several case studies and examples of eligible projects. They can be a little dry, but are definitely worth reading!
- Software examples
- Software case studies
- Examples for various industries (scroll to the bottom)
- Case studies for various industries (opens PDF)
Brush up on the fundamentals of the R&D tax relief scheme
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