Research and development (R&D) tax credits are designed to encourage greater R&D spending amongst companies operating in the UK, by financially incentivising them to carry out a range of qualifying activities. More than 30,000 companies have successfully claimed relief under HMRC’s scheme since 2001, the vast majority of whom are SME’s, with the typical SME claimant receiving over £50,000 in relief each year.
Uptake of the scheme continues to increase steadily year-on-year, with the number of SME’s successfully submitting claims growing by an average of 18% annually. Despite this, many businesses that carry out qualifying R&D activities still fail to take advantage of the sizeable benefits available to them, often driven by gaps in understanding around the range of activities that are able to qualify for from tax relief.
HMRC’s definitions are kept deliberately broad so as to not exclude any industries from claiming tax relief, so what characteristics does a project need to possess in order for the costs to qualify?
Uncertainty arises when your project presents you with scientific or technological challenges where the feasibility of the whole project or individual elements of the project are in doubt.
As a guideline, look for instances where the knowledge necessary to resolve such challenges isn’t readily deducible by a competent professional in the field. If your project requires you to experiment with various different approaches or methodologies to find a solution to the scientific or technological challenges that you’re presented with, then you might be eligible for R&D tax credits.
2. Seeking a Scientific or Technological advance
While scientific or technological uncertainty is the key, the project must be seeking to advance the scientific or technological baseline. This is where a lot of people can fall down, as this ‘advance’ can seem difficult to demonstrate.
A way to ascertain if this requirement is met, is by asking yourself the following question: is my project seeking to make an appreciable improvement to a product, service or process through scientific or technological changes? If the answer is yes, then you are likely in a good place. If the work undertaken can be shown to do something that wasn’t previously possible, or achieves something in a most cost-effective or sustainable manner then this in itself could constitute an advance.
This element points to the fact that a company has to be bearing the risk in order to qualify and this is particularly relevant when taking into consideration subcontracted R&D projects. While subcontracted R&D projects are still able to benefit from relief, the risk of failure, cost overruns or even the risk of potential damage to client relationships must be borne by the company claiming relief.