My client’s R&D project failed—can they still make a claim for R&D tax relief?
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Most of the time when thinking about R&D projects, companies will focus on their successes—those projects where they managed to resolve all of the technical uncertainties, make the technical advances and get a new product or process into the market. These projects are easy to identify and often the easiest to gather cost for. However, focussing solely on successful projects can mean that a company underclaims their R&D tax relief.
Wait, so I can include my client’s failed projects in a claim?
In short, yes! The HMRC guidelines are very clear about this:
“Not all projects succeed in their aims. What counts is whether there is an intention to achieve an advance in science or technology, not whether ultimately the associated scientific or technological uncertainty is completely resolved, or resolved to the degree intended. Scientific or technological planning activities associated with projects which are not taken forward (e.g. because of insurmountable technical or commercial challenges) are still R&D.”
What this means is that, as long as the project met the criteria for eligible R&D, it can be claimed for, no matter the outcome.
Does this mean I can include all failed projects in a claim?
Probably not. There are two things to consider when thinking about failed projects—whether they constituted eligible R&D, and why they failed. This gives you four possible scenarios:
- The project did not seek to make an advance on science or technology, and was shelved for commercial reasons.
- The project did not seek to make an advance in science or technology, and was shelved for technical reasons.
- The project sought to make an advance in science and technology, required the resolution of technical uncertainties, and failed for technical reasons.
- The project sought to make an advance in science and technology, required the resolution of technical uncertainties, and failed for commercial reasons.
Looking at these scenarios, you can see that projects that fall into 1 and 2 would not be eligible for R&D tax relief, as they would not meet HMRC’s criteria for eligible R&D. This holds even when the project fails for technical reasons. For example, if a company wanted to make a new type of lamp using off-the-shelf components but found that they could not make the components work together, they would not be able to include the costs of this project in an R&D claim because no eligible R&D had taken place.
On the other hand, projects that fall into scenarios 3 and 4 would be eligible for R&D tax relief because they do meet the criteria for eligible R&D. This even applies to projects that fail for commercial reasons. For example, if a software company worked to produce advanced software to enable better analysis of Big Data in Marketing but was forced to shelve the project when a competitor released a similar product, they would be able to include the eligible costs of this R&D in an R&D claim.
How do I calculate the costs of a failed project?
Exactly the same as for a successful project! You’d look at the time and materials that were spent on resolving technical uncertainties, calculate the costs and add them into the overall eligible expenditure for a claim. There’s no need to claim for these failed projects separately.