Published 08/02/2023
Modified 15/02/2023
5 min read

A guide on R&D Tax terminology used by HMRC

Innovation Tax breakdown and provide a guide on R&D Tax terminology used by HMRC, relating to the definition of R&D for tax purposes.

A guide on R&D Tax terminology used by HMRC

HMRC’s definition of R&D for tax purposes, as detailed in the BEIS (Department for Business, Energy and Industrial Strategy) guidelines published in March 2004 and updated in December 2010, states that R&D takes place when a project seeks to achieve an advance in science or technology beyond the prevailing scientific / technological industry baseline through the resolution of scientific or technological uncertainty.







But what does this mean outside of HMRC?

Advance in Science or Technology

You must demonstrate an intention to extend overall knowledge or capability within the wider industry (not just in your company’s knowledge) beyond the cutting-edge approach (‘the baseline’) for that industry when the project began. It should be both specific and measurable and may produce tangible consequences (a new product, service or process or an appreciable improvement to an existing product, service or process) or intangible outcomes, such as cost efficiency improvements. Furthermore, where several companies are simultaneously working towards a common goal, where the advance is known to have been achieved but where details of how are subject to trade secrecy or even if the intended advance is not achieved, R&D will still be considered to have taken place.

Scientific / Technological industry baseline

This defines the ‘cutting-edge’ technological solution available when the project began and beyond which the advance seeks to extend knowledge / capability. As such, it’s essential that the reasons why this approach was considered insufficient are clearly defined.

Scientific or Technological Uncertainty

This 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. This often arises when something that has already been established as scientifically feasible is turned into a cost-effective, reliable and reproducible product, service or process. Work undertaken which does not materially affect the underlying science or technology e.g. fine-tuning, bug-fixing etc. does not qualify. ‘System Uncertainty’ results from the complexity of a system rather than uncertainty about how its individual components behave e.g. where individual electronic components or chips are fixed, there can still be uncertainty about the best way to combine them to achieve an overall effect. However, assembling such components to an established pattern (or following routine methods for doing so) involves little or no scientific or technological uncertainty and therefore is NOT R&D.

Competent Professional

An individual with sufficient levels of skill and knowledge in the field and whose specific sector experience gives them the knowledge of the baseline technology available, whose achievements in the field show them to be ‘competent’ and who maintain an up-to-date knowledge of the scientific / technological aspects in the field via, for example, continuing professional development (CPD).

Project

A series of activities seeking to achieve the advance, usually a combination of ‘Qualifying’ and ‘Business-As-Usual (BAU)’ activities; the former may be ‘direct’ or ‘indirect’ in nature.

  • Qualifying direct activity – directly contribute to the resolution of an uncertainty and may include creation / adaption of software, materials or equipment, scientific / technological project planning or the production, testing and analysis of one-off prototypes.
  • Qualifying indirect activity – contribute but do not directly influence resolution of the uncertainty and may include acquisition of information services to report R&D findings, activities such as in-house maintenance, security and administration activities undertaken in support of R&D or training which directly impacts an R&D project.

Activities which do not contribute to the resolution of an uncertainty (and hence are considered non-qualifying) may include production of replica prototypes (where the initial one-off has proved successful), marketing of a new / appreciably improved product, service or process and general support services, such as transportation, storage, cleaning, repair, maintenance and security.

R&D Timeline (Project Boundaries)

Whilst a project timeline may comprise both Qualifying and BAU activities, R&D only occurs during the former and so the boundaries between such activities must clearly differentiate between the two i.e. each ‘phase’ of R&D begins when an uncertainty is encountered and ends once it is successfully resolved (or where efforts to do so are aborted). All activity outside of these ‘phases’ must be considered non-qualifying BAU.

Appreciable Improvement

Occurs when changing or adapting scientific / technological characteristics of something to the point where it is ‘better’ than the original. Although not quantified by the legislation, this should be more than minor, or routine upgrading and should represent something acknowledged by a competent professional in the field as a ‘genuine and non-trivial’ improvement. This does not apply when taking existing science or technology and using it in a different trade or when simply bringing a company into line with overall knowledge or capability, even though it may be completely new to the company or their trade.  

Innovation Tax and its team of tax and technical professionals have significant experience in helping businesses claim R&D Tax Credits, ensuring the claim is robust, maximised and fully compliant with the prevailing legislation. Contact our team of specialists to discuss how we can support your business with not only R&D Tax Credits but other incentives such as Capital Allowances, Patent Box and Grant Funding.

Innovation Tax specialise in helping companies access vital innovation tax incentives and grant funding to enable their businesses to grow, increase profitability, reduce risk and enable further investment in R&D, IP and capital assets.

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