Identifying R&D Activities
The Organisation for Economic Co-operation and Development (OECD) is an intergovernmental economic organisation with 37 member countries, founded in 1961 to stimulate economic progress and world trade.
As per OECD guidelines, research, and experimental development (R&D) comprises creative work undertaken on a systematic basis to increase the stock of human knowledge and to devise new applications based upon it.
There are five criteria key to R&D. They require an activity to be:
- Uncertain in its outcome
- Systematic; and
- Transferable and/or reproducible.
The UK Department for Business, Energy, Innovation and Skills (BEIS) defines R&D as follows:
- R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology.
- The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.
- Certain qualifying indirect activities related to the project are also R&D.
What does all this mean in practice?
If you are creating a new or appreciably improved product, process or service, your business might be carrying out research and development (R&D).
You will probably be attempting to solve a problem where no solution is evident. This can take many forms, and R&D projects can include work undertaken for a client as well as your own business.
The government’s definition of R&D is purposefully broad. Whatever size or sector, if your company is taking a risk by attempting to ‘resolve scientific or technological uncertainties’ then you may be carrying out qualifying activity.
This could include:
- Creating new products, processes or services; or
- Changing or modifying an existing product, process or service to make it better.
In other words, if you are unsure as to whether your project is scientifically or technologically possible, or you don’t know how to achieve it in practice, you could be resolving uncertainties and therefore qualify for R&D tax relief.
How do I know if my projects qualify?
For a project to qualify as R&D, you should have set out to achieve an advance.
That advance must be in the field of science or technology, not just in your company’s own knowledge.
Your project can still be R&D if the advance has already been achieved but the details are not readily available because, for example, they’re a trade secret.
It is important to remember that R&D is inevitably not always successful. If your project is ultimately unsuccessful but sought a solution which was not evident at the outset, it could still qualify for R&D Tax credit.
What is meant by “Appreciable Improvement”?
BEIS guidelines clarify this as meaning “to change or adapt the scientific or technological characteristics of something to the point where it is ‘better’ than the original.”
The improvement should be more than a minor or routine upgrading and should represent something that would generally be acknowledged by a competent professional working in the field as a genuine and non-trivial improvement.
What is not an Appreciable Improvement?
Improvements which arise from taking existing science or technology and deploying it in a new context (e.g., a different trade) with only minor or routine changes are not appreciable improvements.
A process, material, device, product, or service will not be appreciably improved if it simply brings a company into line with overall knowledge or capability in science or technology, even though it may be completely new to the company or the company’s trade.
What kind of projects do not qualify for R&D tax credits?
Generally, routine copying of existing products, processes, materials, devices, or services, will not qualify as R&D.
Work to improve the cosmetic or aesthetic qualities of a process, material, device, product, or service will not itself be R&D. However, work to create certain cosmetic or aesthetic effects through the application of technology can still qualify.
Where does R&D start and finish (R&D Boundary)?
R&D work begins when a project seeks an advance in science or technology and ends when the project’s uncertain elements have been overcome.
Any user-testing or commercial marketing work beyond overcoming the project’s uncertainties is not R&D.