An R&D project, for tax purposes, consists of a number of activities conducted to a method or plan in order to achieve an advance in science or technology. [1] To qualify for R&D relief, the project must seek that advance by resolving scientific or technological uncertainty. [2] Work that directly contributes to resolving that uncertainty is R&D, as are certain qualifying indirect activities related to the project. Only costs from the start to the end of the project can be included.
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What an R&D project is for tax purposes
An R&D project, for tax purposes, consists of a number of activities conducted to a method or plan in order to achieve an advance in science or technology. To qualify for relief, the project must seek that advance by resolving scientific or technological uncertainty. [2]
Whether the work may qualify for R&D tax relief then depends on which activities fall inside the project and which costs attach to them.
The advance has to be in the overall field rather than just for the company, although a process, product or service developed by another company can still be an advance if it is not publicly known or available.
Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field. [1] Uncertainties that can readily be resolved by a competent professional working in the field are not scientific or technological uncertainties.
Which activities sit inside an R&D project
Activities that directly contribute to achieving the advance through the resolution of scientific or technological uncertainty are R&D, and certain qualifying indirect activities related to the project are R&D too. Qualifying indirect activities include supporting work such as maintenance, security, administration and clerical activities, and finance and personnel activities, insofar as undertaken for R&D.
Scientific or technological planning for the project is R&D. Planning that does not directly contribute to resolving the uncertainty, such as researching market niches or examining a project's financial, marketing and legal aspects, is not R&D.
Where meeting design objectives requires the resolution of scientific or technological uncertainty within a project, that design work is R&D, while design activities that do not directly contribute to resolving it are not. An R&D project may itself be part of a larger commercial project, but that does not make the parts of the commercial project that do not address scientific or technological uncertainty into R&D.
The end point matters too. Testing carried out as part of developing a pilot plant would be R&D, but once the design of the final pilot plant had been finalised and tested, further testing would not be R&D. Work to remedy design flaws that appear later would be R&D if they could not readily be resolved by a competent professional working in the field. Even if the advance a project seeks is not achieved or not fully realised, R&D still takes place.
How R&D is defined for tax purposes
R&D stands for research and development. For tax purposes, R&D takes place when a project seeks to achieve an advance in science or technology. The tax definition follows generally accepted accounting practice, modified by Guidelines that are given legal force by Parliamentary Regulations. The Guidelines apply equally to work in any branch or field of science or technology.
An advance in knowledge or capability may have physical consequences or may be an increase in overall knowledge, and in either case a competent professional working in that field would recognise it as an appreciable improvement. Relief for R&D is only for companies chargeable to UK Corporation Tax.
Project costs that may count as R&D expenses
A project that qualifies as R&D for tax purposes does not always mean the tax relief can be claimed on all R&D-related costs. [3] Costs can only be included from the start to the end of the project, and costs that have not been paid before the claim is made are not eligible. [4]
Allowable costs can relate to direct R&D activity and to qualifying indirect activities, including security as long as it relates solely to the R&D project.
Staff costs follow the time spent on the project: if a member of staff spends 90% of their time on R&D activities and 10% on other activities in the company, 90% of their salary can be claimed.
Only the cost categories set out in the guidance can be claimed, so costs such as rent, rates or leasing costs cannot. The guide to how R&D tax credits are calculated covers the cost categories in more detail.
R&D begins when work to resolve the scientific or technological uncertainty starts, and ends when that uncertainty is resolved or work to resolve it ceases. A project may itself be part of a larger commercial project, but that does not make the parts of the commercial project that do not address scientific or technological uncertainty into R&D.
R&D grants and subsidised project costs
An R&D grant is a form of subsidy or financial support a company receives towards a project, and the cost guidance deals with it as a question of subsidised costs. For accounting periods beginning on or after 1 April 2024, there is no restriction on claiming for subsidised costs under the merged scheme or enhanced R&D intensive support. [4]
For accounting periods beginning before 1 April 2024, an SME that had received a notified state aid could only claim the allowable costs using the RDEC scheme. For those earlier periods beginning before 1 April 2024, an SME that received any other grant or financial support that did not cover all its costs could claim the uncovered part under the SME scheme and may have been able to claim the covered part under the RDEC scheme.
Testing a project with HMRC's checking tool
HMRC's online tool gives its view on whether a project involves R&D for tax purposes, based on the information provided, and it is completed on the facts of each project. [3] A competent professional is needed to answer some of the questions in the tool.
HMRC recommends saving or printing the result and keeping a record of the information used to answer each question. Where the answers are based on the project's facts and can be clearly supported and explained, HMRC is unlikely to disagree that the project involves R&D activities.
A claim also needs to be able to explain the work done to overcome the uncertainty, which can be a simple description of the successes and failures during the project. The guide to claiming R&D tax credits for earlier years covers notification and timing.
Sources
Rates, thresholds and dates in this guide come from these sources. Check the source for the current figure.
- GOV.UK, Meaning of research and development for tax purposes (guidelines) www.gov.uk
- GOV.UK, Check if you can claim Research and Development (R&D) tax relief www.gov.uk
- GOV.UK, Check if a project includes activities that qualify as Research and Development for tax purposes www.gov.uk
- GOV.UK, Check what R&D costs you can claim www.gov.uk