Tripping over R&D: can companies claim tax relief for serendipitous discoveries?
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Imagine you’re a biomedical scientist doing routine testing in a company laboratory. Day-in, day-out, you run the same tests using the same equipment, testing kits and reagents. But then, one day, one of your tests starts working better – it’s twice as sensitive and takes half the time! After a little investigation you discover that you’d mistakenly used a different buffer solution (someone in procurement must have messed up…). You confirm your initial observations and realise that you’ve made a small but not insignificant advance in biomedical science – yippee! Of course, the next question you ask yourself is ‘can I claim R&D tax relief for this work?’
Ok, we know that this is an unlikely scenario – no-one makes a major discovery and then immediately thinks about R&D tax relief! However, it’s important to understand why your clients’ serendipitous discoveries aren’t eligible for R&D tax relief.
Firstly, we should make the point that these types of discoveries aren’t specifically excluded, or even mentioned, in the guidance, unlike in other countries’ R&D tax relief schemes. This means we have to look at HMRC’s eligibility criteria to understand why this type of advance cannot be claimed.
For work to be eligible for R&D tax relief, HMRC require that the company demonstrate five key things:
- The work was carried out in an area of science or technology
- The work was carried out by competent professionals
- The work sought to achieve an advance in science or technology
- The work was done as part of a project
- Significant technical uncertainty was encountered during the work
If we examine the above example against these requirements, we can see that it does meet the first two criteria – it’s very definitely science, and it was carried out by a competent professional – all good so far!
The next two criteria must be taken together, and this is where it gets interesting! Overall, the discovery described would constitute an advance in biomedical science, as new knowledge has been generated. However, the work being done was routine, and wasn’t undertaken as part of a project that sought to make an advance in science or technology. This means that these criteria haven’t been met, and the work can’t be considered eligible.
Finally, this lack of a project and scientific or technical aim means that technological uncertainty cannot have been encountered during the work – at no point did the scientific staff wonder whether it was feasible to double the specificity of the test, because they weren’t trying to! From their point of view, all the work was routine and worked as expected right up to the point of making the discovery.
These points apply to any project carried out by your clients, in any sector—not just biotech—so it’s vital that you probe any discoveries that they have made to make sure that only eligible work is included in a claim. On a more positive note, remember that any R&D done after the discovery to, for example, validate the findings or commercialise the output could be eligible, so even though the serendipitous discoveries themselves can’t be claimed for, they often lead to a lot of eligible R&D work!