The boundaries of R&D for R&D Tax Relief Purposes

18 December 2023

The financial benefit of a research and development (R&D) tax relief claim is based on qualifying expenditure attributed to your qualifying projects. But before you can begin to work out how to link qualifying expenditure to your project work, there’s some work to do. You must understand which activities contribute to achieving the sought advance in science or technology for the purpose of this tax relief, and are within the scope of the boundaries of R&D for tax purposes. It’s not always obvious! 

There’s often some degree of confusion when a business first encounters this exercise. To be absolutely clear – it’s necessary to identify and exclude activities that support the business more widely, but are considered too remote a link to contribute to achieving the scientific or technological advance – for the purposes of R&D tax relief.

Again, assessment can at times be a mixed bag between clear rules and subjective nuances within the rule base.

the overarching r&d framework

R&D begins when work to resolve the scientific or technological uncertainty standing in the way of you achieving the sought-after advance starts, and ends when that uncertainty is resolved or work to resolve it stops.

When looking to assess qualifying activities, define your R&D project at its highest possible level and clearly identify the main scientific or technological uncertainties around that. What is, ultimately, the principal advance in science or technology sought and what are your development objectives in terms of stretch goals for the science or technology that will facilitate achieving the advance – i.e., what is it that science or technology doesn’t yet know how to do or achieve in practice.

An R&D project will never encapsulate the primary commercial project in its entirety. It will be a sub-project, or collection of sub-projects, that are interdependent in their search for scientific or technological advancements.

Taking a step back to evaluate and define the series of interdependent technical objectives is helpful. This is because the guidelines say it’s possible to include all activities that directly or indirectly contribute to overcoming technological uncertainties in relation to the advance sought, whether or not they are R&D in their own right.

We’re looking at projects that collectively seek a scientific or technological advance, not projects with a commercial objective. This is why R&D projects are identified as sub-projects that support a main commercial aim, and why it’s incorrect to include all undertakings whatsoever that combine to deliver a commercial project in its entirety.

what are qualifying direct activities?

Qualifying direct activities are concerned with the “doing”, “implementing” and “executing” of the actual scientific or technological problem-solving work/. For example:

  • Setting scientific or technological specifications
  • Proof of concept work
  • Scientific/technological design, development, testing and analysis
  • Steering the direction of R&D efforts, such as a scientific/technology steering committee
  • The design, construction and testing of prototypes/systems or test rigs/systems to facilitate exploratory work
  • Work to devise a testing protocol to measure results, that feed back into the problem-solving tasks.

what are qualifying indirect activities?

Qualifying indirect activities are the activities which closely support or enable the direct activities to be carried out. These activities are not directly concerned with carrying out the problem-solving work, but are entirely linked to facilitating the progression of development efforts throughout the development lifecycle.

For example:

  • Feasibility studies to inform the strategic direction of a specific R&D activity (not to be confused with market gap analysis or business requirements gathering). Can include research of information in existing patents to inform the direction of a new R&D endeavour.
  • Research to devise new scientific or technological testing, measurement or sampling methods where this is not the subject of R&D in and of itself – includes related data collection for analysis and exploration.
  • Scientific and technical information gathering, such as documenting findings throughout the R&D development process.
  • Maintenance of R&D equipment, security, administration and clerical activities, plus finance and personnel activities. The key test here is that these activities are not too remote from supporting or facilitating the qualifying R&D work.
  • Planning and management of the development work resourcing and process.
  • Recruiting of staff. Note this would not include third-party recruitment agency activities, nor a general HR manager – but the time spent by a key staff member within the R&D team trying to recruit into their team could be considered.
  • Training required to directly support an R&D project. Note it is time spent undertaking or delivering training – not the cost of a training course, for example.

what type of activities do not qualify?

Work related to non-scientific or non-technical matters that are too far removed from the scientific/technological problem-solving work, for example:

  • Non-project related tasks such as business development, due diligence, contracts, procurement.
  • Researching market niches.
  • Any sales or marketing aspects.
  • Examination of project financials.
  • Production and distribution of goods or services.
  • Routine projects or tweaking/bug fixing where no technological or scientific uncertainties existed.
  • Business or commercial activities such as marketing work, documentation/technical authoring, and launch communications.
  • Business or commercial activities that do not involve any R&D nor contribute directly or indirectly to a qualifying R&D project.
  • Patent applications – applying for a patent can’t be included, because it’s a commercial endeavour that doesn’t in and of itself contribute to, or support/enable, scientific or technical problem-solving efforts.

Tax Technical Point: Involve your Competent Professionals in the assessments of qualifying activities – clearly identify these professionals and the relevance of their credentials to the qualifying work.

who is a “competent professional”?

Tax guidelines require an assessment to be made by a “competent professional working in the field” that is reliable and authentic. Until recently, no further specifics were provided to clearly define what HMRC is looking for. However, new guidelines issued in October 2023 went into more detail.

Many businesses interpret this too widely and mistakenly believe a person with a strong working knowledge of the work undertaken meets the requirements of a competent professional.

HMRC is only looking to see persons with science/technology qualifications and hands-on technical experience in the relevant field when it comes to competent professionals.

You should avoid citing business leaders or commercial project managers with no scientific or technical credentials. Whilst these roles may be key to the development process and deliver a great deal of relevant experience to this end, if the personnel in these roles do not hold relevant scientific or technical credentials, or are not involved in the scientific/technological work directly, this won’t satisfy HMRC.

Indeed, putting forward non-technical staff as Competent Professionals over technical staff could be detrimental as it raises the question as to whether your business is able to correctly identify a material advance in your field.

Here are some pointers around HMRC expectations when it comes to the credentials and expertise of a “competent professional”:

  • Knowledgeable about the relevant scientific and technological principles involved in the work.
  • Relevant science/technology qualifications.
  • Strong awareness of the current state of knowledge in the relevant field of work.
  • Accumulated time-served experience (recognisable as having a track record of success working in the relevant field).

working with a specialist R&D chartered tax advisor

We collaborate with people in businesses, large and small (starting out or established) to put together authentic claims for R&D tax relief.

Working closely with the right people in your company, together we’ll identify your qualifying projects and carefully link up associated expenditure to maximise the cash benefits of this tax relief with 100% compliance.

We’ll help you understand the eligibility criteria and guide you through a way to assess your work against this. We’ll look at the areas where you have incurred costs and how these costs can be attributed to the qualifying aspects of your work.

We can take the facts we’ll gather throughout the assessment process and produce a robust report for submission to HMRC in support of your claim. Our R&D service line can also put you in touch with other specialist service lines within Fortus.

Think you have an r&d claim?

To speak to professional R&D experts at Fortus, get in touch with us by email or phone 0116 490 0279 today.