This example is taken from the Department for Business, Innovation and Skills Department’s ‘Guidelines on the Meaning of Research and Development for Tax Purposes’.
We’ve broken it down into a bit more detail and used everyday English throughout. It is based on a fictional company’s project but all the R&D tax relief references are completely legitimate.
Overall commercial aim of the project
To bring a new DVD to market with different design and technical features.
Step 1: Market research
The company invests in lots of market research in order to work out what kind of new design and technical features the public would like in their DVD player.
None of this initial work is R&D for tax purposes.
Step 2: Identify innovation potential
Their market research throws up several ideas leading to the technological developments that are an appreciable improvement on existing products. The company’s R&D Department contains competent professionals that think this project will definitely be seeking to resolve a scientific or technological uncertainty.
Step 3: Plan development of product
Staff write a plan for the development of this new product, breaking down the different stages into their component parts. Some of these elements are R&D, some are not.
Work that focuses on addressing the new technology issues are R&D. This includes the planning phase of these activities. In this case, the company are trying to improve the control mechanism for the laser that reads the DVD.
Planning and doing other activities for this work are not R&D because they do not directly contribute to solving the uncertainty. These include commercial design and securing intellectual property rights. These do not fall under the definition of qualifying indirect activities, so are not R&D.
Step 4: Prototype
The work eventually results in a ‘final’ prototype DVD player being produced from a series of prototypes. Usual testing is done to ensure that it meets the intended criteria. All of the production and testing of prototypes is part of your R&D. It all contributes to resolving the technological uncertainty you started with.
Step 5: Prototype consumer testing
The company then makes copies of the prototype to try out with consumer testing groups. This is not R&D.
Step 6: Taking on feedback
The feedback from the consumer testing groups is considered. Several participants felt there is a problem with the noise the DVD makes when it is being used. So the company plan and execute some more work to sort out this issue.
If this just need some minor tweaks to the final prototype, then it will not be classed as R&D.
If this work requires the resolution of a further scientific or technological uncertainty, then it will become R&D.
Obviously, this is a simplified version of what it takes to bring a new product to market. But our purpose here is to hone in on the steps where there may be confusion around what is and is not R&D for tax purposes.
If you are leading a project, you must give due care and attention to all the elements in order to achieve success. It can be difficult to include R&D tax relief requirements amongst all your other responsibilities. Companies that have a designated R&D department will, rightly, delegate the scientific or technological uncertainty part straight to them. But you could be missing out on several qualifying indirect activities, if you do not consider the whole project through an R&D lens.
Hopefully, placing these regulations into the context of an example has made them a little easier to understand. And you’ve had a few “Oh, we do that!” moments.
We have several free guides which focus on the different R&D tax relief schemes that you could be eligible to apply for. If in doubt, it’s always worth checking with us. The worst that can happen is that your project doesn’t qualify for any R&D tax relief. The best that can happen is a substantial cheque to help fund your next innovation – our average stands at £49k.