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Identifying Eligible Clients webinar questions answered

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Thanks to everyone who joined us at our Identifying Eligible Clients webinar on Wednesday 18th November. This time we kicked off the session with a deep dive into eligibility within three sectors – construction, hospitality and textiles – which led to some great questions being asked by our attendees. We’ve answered those below.

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For those who joined us on the 18th November, here’s the answers to your questions:

1. If a company subcontracts R&D to a specialist contractor, what happens if the specialist contractor also wants to claim for the work?

2. Could you define what would be a qualifying R&D contract with a sub-contractor?

3. If it is a pay as you go type contract is its more likely the R&D will fall with the contractor?And if it is a fixed price contract where the contractor has said “we will pay you a fixed cost for you to deliver X” then is it more likely R&D will fall with the specialist sub-contractor?

These three questions are very closely related, so it seems sensible to consider them together! To take the first question first, the rules around subcontracted R&D are designed to prevent two companies claiming for the same costs within a single R&D project. So, if the specialist subcontractor wants to claim, they’d have to prove that the work they did was not subcontracted R&D, rather work that they did at their own risk and cost to deliver a product to a customer. This usually comes down to how the contract is arranged, which brings us to the other two questions posed here.

The attendee here who asked about fixed price vs. time and material contracts has hit it squarely on the head! A subcontracted R&D contract, where the claim would sit with the contractor rather than the specialist subcontractor, is usually a time and materials-type contract, and often states clearly that there is a need for research or development or both. Work that is likely to sit with the specialist subcontractor, on the other hand, is often the result of agreeing a fixed-price contract to deliver a product, and then realising that that product cannot be delivered using standard methods or processes! This leads to the specialist subcontractors initiating projects at their own cost to resolve technical challenges and gaining knowledge that they can use to deliver contracts in the future.

4. A technically competent subcontractor designs meals for a supermarket and large-scale food manufacturers, taking several attempts to meet the requirements. The contracting company reimburses the subcontractor for the failed attempts. Who can claim the R&D in this situation?

Following on from the above, this seems like a classic case of subcontracted R&D – the specialist subcontractor is being paid by companies to do their R&D, and is taking no commercial or financial risk. In this case the claim would lie squarely with the contracting company, assuming the work met the criteria for eligible R&D.

5. Is there eligibility in specialist recipe development, for example gluten-free or vegan products? And in terms of scale for hospitality, what would you consider as large enough to qualify if they have made large changes to recipes?

We’ve grouped these two questions together because the answer to the first one is almost certainly, depending on the scale of production!

You can read more details about eligibility in food and drink and hospitality in previous blogs, but you will almost always find eligible work where companies are trying to produce, at commercial scale, vegan or gluten-free alternatives to common products. For example, trying to produce an acceptable vegan cheese is fraught with difficulty, and demands a great deal of R&D.

When we say ‘at commercial scale’, what we’re really saying is not at the level of a domestic kitchen or even a larger restaurant kitchen. In those types of environment, it’s very unlikely work will be taking place that advances science or technology, or even the food production industry as a whole.

6. I have a client who thinks they are eligible for R&D. It’s a company that sells restaurant grade meals to be cooked at home. They developed recipes that are environmentally friendly. Are they likely to have eligibility?

Almost certainly not. This seems like standard recipe development using tried and tested techniques. The storage and delivery of high-end foods have also become very standard recently, and there’s plenty of information in the public domain about how to do this.

7. I have another client who developed a new product – a mystery challenge letter that you send to someone as birthday present, the recipient needs to solve a sequence of puzzles to get to either present or online video with a birthday message. Does this sound eligible?

Again, this doesn’t sound like it would have much eligibility. It does sound commercially innovative (and a lot of fun!) but it wouldn’t require the makers to advance science or technology in any way, so wouldn’t be eligible for R&D tax relief.

8. Is there eligibility in the development of new board games?

Similar to the question above, it’s unlikely that a manufacturer would have to advance science or technology in the design or production of a new board game. There’s a slight chance that there’d be some eligibility if the games involved some serious tech, for example facial recognition or AI to predict a player’s next move, but these types of games are few and far between.

9. My client is an IT Benchmarking company. They had a large database on spreadsheets and converted this into a complex SQL/Power BI database system to make it more efficient and scalable. They could also sell the system in the future if they decide to exit. Is this work likely to be eligible for R&D tax relief?

It’s hard to say without knowing more about the technical challenges involved, but on the surface it seems unlikely. Spreadsheets, SQL and Power BI databases are all tried and tested technologies, and while it appears that they are being put to good use, this is likely to be a project that is commercially rather than technologically innovative.

10. Would a project to further develop off the shelf apps to make them perform better be eligible?

Quite possibly, yes – it depends on how the developers are trying to make those apps better, what ‘better’ means in terms of technology, and the nature of the technological challenges that they were faced with. Fine-tuning or optimisation of an app is unlikely to qualify, but a complete redesign to make it far more efficient in terms of data processing could be.

11. Is there eligibility in scaffolding?

The short answer to this question is no. Scaffolding is a well-established non-technical industry that is unlikely to come across difficulties that cannot be solved using standard methods and techniques.

12. I have a lot of construction industry clients who are looking to make R&D claims. An example is a client who works in building foundations for developments. Would you say if they came across a specific development project where they faced technical challenges in building the foundations which could not be resolved using their normal industry practices – would there be R&D?

In this situation we’d say yes, there’s a chance that they would be doing eligible R&D. What we’d look for is work that requires not only the development of methods that are new to the industry, but where these new processes or methods incorporate an advance in science or technology, be that in engineering or even biology if soil remediation was required.

13. One of our clients manufactures heated clothing and is experimenting with different materials and batteries – would this qualify for R&D?

The manufacture of technical or performance clothing tends to be more eligible than the production of fashion clothing, due to the need to do work in the areas of chemistry, electronics and materials science to achieve the required performance. In this particular scenario, I’d expect to find some eligible work – improving battery performance or flexibility of heated clothing, for example, would be likely to require advances to be made in science or technology.

14. Is there any eligibility in wedding clothing?

As with the manufacture of fashion clothing, makers of wedding clothes are under pressure to produce new designs and products for every year and seasons. However, it’s unlikely that this product development work involves any eligible R&D – they will be using established techniques and off-the-shelf materials to produce these designs. The only area that might have some eligibility would be the production of specialist textiles for the wedding industry. For example, if a textiles manufacturer attempted to make a fabric with the look and feel of silk but half the weight, and had to make advances in engineering to do this, they might have an eligible claim.

15. I have a client that is a wholesale butcher with a turnover of £2m. They’ve done a lot of work on cleaning, their distribution process and storage enhancements – is any of this likely to be eligible?

In general, work done to improve distribution processes, no matter the industry, is unlikely to be eligible for R&D tax relief. We’d also say that, in the food production industry, improvements to cleaning methods is also unlikely to contain any eligibility.

In the context of storage enhancements, it would depend on what this work involved. If, for example, the wholesale butcher working closely with a specialist refrigeration company to make advances in the technology underlying flash freezing, they might have a claim. However, if it involved a logistical study of their cold chain in order to ensure that the products remained at optimal temperatures throughout the delivery process, this wouldn’t qualify for R&D tax relief.

16. Can you confirm that if a company obtained a patent for their product, there is a strong case for R&D claim?

We’d say that having obtained a patent makes a strong-er, but not always strong, case for an R&D claim! While it is likely that a company will have done R&D to be able to apply for a patent, it’s not always the case that this will be eligible R&D by HMRC’s definition. To be able to get a patent, a company’s idea has to be ‘something that can be made or used’ and ‘inventive’. From this you can see that a patent could be granted for something that uses existing technologies in innovative ways, which wouldn’t necessarily qualify for R&D tax relief. Having said all of that, looking at your clients that have applied for or been granted patents can be a good way to identify companies that are doing innovative things, which is a good start!

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How to write an R&D tax relief technical narrative

With HMRC’s new mandatory requirement for project descriptions on all submissions, we wanted to share our experiences to help others to write their best possible technical narratives.

Available to download here.

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