R&D process: steps, start and end, and tax R&D

What does R&D process mean?

For tax purposes, the R&D process is the work a company carries out to seek an advance in a field of science or technology by resolving scientific or technological uncertainty. ^[1] It starts when work begins to resolve that uncertainty and ends when the uncertainty is resolved, or the work to resolve it stops.

Whether that work may qualify for R&D tax relief depends on what the project set out to resolve, not on the name of the team or department that did it. Only companies chargeable to UK Corporation Tax can qualify for this relief.

Steps in an R&D project, from uncertainty to result

The four steps below are a practical way to organise a project and its notes, rather than a sequence laid down in the guidance.

Step 1: identify the uncertainty. A scientific or technological uncertainty exists when an expert on the subject cannot say if something is technologically possible, or how it can be done, even after referring to all the available evidence. This means the company or experts in the field cannot already know about the advance or the way to solve it. Useful notes at this step record what was known at the outset and why it did not answer the question.

Step 2: investigate and test. Designing, prototyping and running trials aimed at the uncertainty form the core of the project, and notes made at the time show what was tried and why.

Step 3: record successes and failures. The work done to overcome the uncertainty needs to be explainable, and this can be a simple description of the successes and failures during the project. The explanation should also show why a professional in the field could not easily work out the advance, for example by showing that other attempts to find a solution had failed.

Step 4: establish the endpoint. The project ends when the uncertainty is resolved, or when the work to resolve it stops, so either outcome can mark the end. ^[2] An advance in knowledge or capability may have physical consequences or may be an increase in overall knowledge.

The start and end also frame the costs: when working out what R&D costs can be claimed, only costs from the start to the end of the project are included. The guide to how R&D tax credits are calculated covers the cost categories, and the guide to claiming R&D tax credits for earlier years covers notification and timing.

What is tax R&D?

Tax R&D is R&D as defined for tax purposes in section 1006 of the Income Tax Act 2007. ^[3] For these purposes, science is the systematic study of the nature and behaviour of the physical and material universe, and technology is the practical application of scientific principles or knowledge. From 1 April 2023, mathematical advances can be treated as science for these purposes, whether or not they are advances in representing the nature and behaviour of the physical and material universe.

The project has to aim for an advance in the overall field, not just for the business, although a process, product or service can still be an advance if another company developed it but it is not publicly known or available. Advances sought in the arts, humanities or social sciences, including economics, cannot be claimed. The R&D meaning guide covers the definition in more depth.

Which is better, R&D or QC?

Neither is better in general, and for tax relief the comparison does not turn on a team's label: the question is whether the activity seeks an advance in a field of science or technology.

Improvements may include appreciably improving an existing process, material, device, product or service, for example to save costs or reduce waste, where the change is a genuine non-trivial improvement and more than a minor or routine upgrade.

Some testing work can sit inside an R&D project. Research, including related data collection, to create new scientific or technological testing, survey or sampling methods, where this research is not R&D in its own right, is listed as a qualifying indirect activity. A quality team that devises a new sampling method as part of an R&D project may therefore be carrying out one of these listed activities.

Supporting work around the project

Qualifying indirect activities are tasks that form part of the project but do not directly contribute to the resolution. Named examples include preparing the original R&D findings report, administration, clerical activities, and finance and personnel activities. Security also appears on the list, as long as it relates solely to the R&D project, as does maintaining R&D equipment, including computers used for R&D purposes, if it is essential to carry out the R&D. Feasibility studies to inform the strategic direction of a specific R&D activity are listed among the qualifying indirect activities too.

Checking a project and keeping records

HMRC has an online tool that gives its view on whether a project involves R&D for tax purposes, based on the information provided about each project. A competent professional is needed to answer some of the questions in the tool. ^[4] Saving or printing the result and keeping a record of the information used to answer each question is recommended.

A company can also show that the people working on its project are professionals in that field and get them to explain the scientific or technological uncertainties involved. These are often the same people who can describe where the project started, what was uncertain and what the testing showed.

A project qualifying as R&D for tax purposes does not always mean relief can be claimed on all R&D related costs.