What is the definition of ‘R&D’?
It might seem an obvious question, though is one we get asked a lot, and for good reason. A fundamental understanding of what R&D is – and what activity can constitute it – is critical when assessing whether your business might have a valid claim, so it is a prudent discussion point.
First things first, what is ‘R&D’?
R&D stands for ‘research and development’. It is the process and activities that your business undertakes to create new or improve existing products, systems, operations, or processes.
In a broader context, it can be viewed as ‘innovative development’, so if your business has applied an innovative solution to a specific problem in your field or industry, you may well be eligible to claim tax relief on eligible R&D expenditure.
But what is ‘innovative development’?
The breadth of this term doesn’t help when trying to assess whether your R&D activity qualifies for tax relief. Helpfully, HMRC provides us with a definition of how it classifies R&D for the purposes of tax relief:
“Activities that seek to:
- Achieve an advance in overall knowledge or capability in the field of science and technology, and;
- Resolve scientific or technical uncertainty”
Clear as mud? Let’s look into it…
- “Achieve an advance in overall knowledge or capability…”
This means that your activity must be demonstrably innovative, or lead to an innovative outcome for your industry. The key point is that your outcome must not be common knowledge or discoverable with light online research. So, purchasing light furnishings to spruce up your restaurant business is not considered R&D.
It helps to think of the definition in the context of medical R&D charities like Cancer Research UK. The activity such research facilities undertake is exceptionally challenging, requires substantial investment, significant internal and external resources, and the intended solution is not easily discoverable. That’s not to suggest that your R&D projects must incur similar costs or utilise similar resources, but the concept is the same.
The word “achieve” can be easily misconstrued, as it indicates that your project must have been commercially successful, however, this is not the case. If you can provide evidence that expenditure was being committed to finding an innovative solution that was not easily solved, you stand a good chance of including it in your claim for tax relief.
- “… in the field of science or technology”
This is the most confusing part of HMRC’s definition, as many businesses we speak to assume they are ineligible because they don’t operate in the field of science or technology.
This section means that the innovative solution you are attempting to uncover is a scientific or technological development. Your business itself does not have to be in that sector. Indeed, HMRC’s list of eligible businesses sectors is exceptionally broad, for obvious reasons when we remember that the original reason for the scheme’s introduction was to encourage and incentivise growth across the UK economy and not just in certain sectors.
For example, a brick-and-mortar retail business that needs to digitise or automate its operations – such as a need for bespoke stock management software – could be eligible for tax relief. The business itself does not strictly operate in the field of science or technology, but the solution it is applying is definitively technological.
You may think, “But many retail businesses need to create automated stock management software”. And, fundamentally, you’d be right, but if the process and intended solution was one that isn’t classed as common knowledge or easily discoverable, then it could still be claimed against.
Our team understands this grey area well and can help you navigate.
- “… and resolve scientific or technical uncertainty.”
‘Uncertainty’ is the important word here. You’ll need to demonstrate that a solution to your problem is difficult to find or uncover, hence the need to undertake specific research and development-based activities.
This extends to both scenarios in which you either A) know or B) do not know if your intended solution is even feasible or possible, as this is all part of the validation research that could be included within a claim.
HMRC do not include in their definition that the developments or advancements you achieve must be ‘significant’, not iterative, or incremental. The science or technology that underpins the solution must be unique each time.
HMRC also states that:
“…[your intended solution must not be} … deducible by a competent professional working in the field.”
More complexity, so what does this mean?
A ‘competent professional working in the field’ means someone with experience in the relevant scientific or technological principles you seek to apply. They need to have a track record in their field and have an acute awareness of what advanced solutions in their field look like.
In essence, if you employed someone who fits this description to help you implement your solution, this would not constitute a valid claim.
Need some help working out if your R&D activity is eligible?
There you have it, by now you should have a basic understanding of whether your R&D activity will be eligible to claim tax relief.
It is important to remember there are many factors that influence your ability to claim, and how much. Our expert consultants can determine if your activity is eligible or advise you on changing your approach to maximise your chances of eligibility for future claims.
Contact our client team today, and we’ll help you through the process and start you on the path to rewarding your risk and innovation.
