In this article we will cover the definition of R&D for your R&D Tax Credits application, as this is quite different from the general definition of R&D.
But first, let’s take a closer look at the R&D Tax Credits Scheme.
What are R&D tax credits?
Research and Development (R&D) Tax Credits is a UK government scheme that incentivises companies to conduct innovative projects in science and technology. They work by either reducing a company’s liability to corporation tax or through a cash payment to the company.
In order to claim R&D tax credits, the company must submit to HMRC an R&D claim and show that the work was done as part of a specific project to make an advance in science or technology.
The projects must relate to the company’s trade, either an existing one, or one that the company intends to start based on the results of the R&D.
R&D tax credits can even be claimed on unsuccessful projects.
R&D Tax Credits explained
There have been 59,000 R&D tax credit claims in the UK for 2018-19 and £5.3bn of R&D tax relief support has been claimed. There is a steady increase of around 15% a year in the number of R&D claims.
There are two schemes for claiming relief, based on the size of the company:
- The Small or Medium-sized Enterprise (SME) Scheme, and
- The Research and Development Expenditure Credits (RDEC)
The SME scheme is more advantageous than the RDEC scheme as it allows companies to claim back up to 33% of the money they spent on R&D, compared to only 13% on the RDEC scheme. Also, an SME which has no tax bill to reduce may claim a cash payment instead.
Companies can claim R&D tax relief through the SME Scheme if they have:
- fewer than 500 staff
- a turnover of under €100m or a balance sheet total under €86m
If the company has either over 500 staff or more than €100 million turnover or €86 million gross assets, they should use the RDEC scheme.
In some cases, such as if the company received a state aid grant or if the company is a subcontractor for another company – the company may have to claim under the RDEC scheme, despite having fewer than 500 staff or a turnover of less than €100m.
The definition of R&D for Tax Credit purposes
R&D has a specific statutory definition for the purposes of R&D tax relief which is different from the commercial, engineering or accounting definitions. Judging which projects and activities will fall under the definition of R&D for the purposes of R&D tax relief is usually the area where most companies seek help.
When a company submits an R&D claim to HMRC, it is important to give details about their projects and set clear and correct answers to the 4 questions below. This will show their projects fall within HMRC definition for R&D.
1. What is the scientific or technological advance?
The R&D claim should set clearly what scientific or technological advance is being sought. Also, some activities aren’t considered ‘science’, for example: work in the arts, humanities and social sciences (including economics) doesn’t qualify as science for the purposes of R&D tax relief.
The claim should set clearly how it will incorporate an advance in science or technology, ‘commercially innovative’ isn’t enough.
As for ‘advance’ it’s worth to take a look at some guidance from the BEIS Guidelines:
An advance in science or technology means an advance in overall knowledge or capability in a field of science or technology (not a company’s own state of knowledge or capability alone). This includes the adaptation of knowledge or capability from another field of science or technology in order to make such an advance where this adaptation was not readily deducible.
An advance in science or technology may have tangible consequences (such as a new or more efficient cleaning product, or a process which generates less waste) or more intangible outcomes (new knowledge or cost improvements, for example).
A process, material, device, product, service or source of knowledge does not become an advance in science or technology simply because science or technology is used in its creation. Work which uses science or technology but which does not advance scientific or technological capability as a whole is not an advance in science or technology.
2. What scientific or technological uncertainties were encountered?
The company should show clearly in the R&D claim that they encountered uncertainties during the projects. Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, isn’t readily available or deducible by a competent professional working in the field.
3. How and when were the uncertainties overcome?
The R&D claim should describe at a high level the methods used to overcome the uncertainties. This shouldn’t be in great detail, but enough to show it wasn’t straightforward. If the uncertainties weren’t overcome, that’s totally fine and does not represent any issue in terms of R&D for the purposes of R&D tax relief.
4. Why wasn’t the knowledge being sought readily deducible by competent professionals?
The R&D claim should describe the uncertainties in the context of the known state of the field of research. It might be the case that others have tried and failed to resolve the uncertainties. Or maybe they have succeeded, but it isn’t publicly known how they did it. Both scenarios are ok for the purposes of R&D tax relief.
Also, if there’s limited available information about the state of the field of research, in this case the company will need to show that competent professionals are leading on the projects, by outlining their relevant background, professional qualifications and recent experience.
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