R&D Tax Credits Glossary

Essential Guide to R&D Tax Relief Definitions

Lots of people don’t even investigate their R&D tax relief eligibility because they know it requires a reasonable time investment just to understand the available schemes. We know this because our clients tell us. If you are one of those business owners, we’ve produced this guide especially for you. It should speed things up for you.

It is based on the Department for Business, Innovation and Skills’ snappily titled ‘Guidelines on the Meaning of Research and Development for Tax Purposes’. These are from the Secretary of State for Trade and Industry and are designed to explain what R&D means in the context of the tax system. The guidelines “use a number of terms…which are intended to have a special meaning for the purpose of the guidelines.” These are the words and phrases that we are going to explain.

Why is it so difficult to understand?

Part of the problem is that HMRC are using words that already have a meaning. But they use them to create very specific tax regulation meanings. This could be single words, or multiple word phrases. You come to the language with a definition in place, which is then redefined – confusing in itself.

As HMRC rules need to include every possible scenario, there is a lot of detail. They are written with accessibility in mind and the actual language is clear. But all the ifs, ands and buts adds another layer of complexity. It requires a little patience to figure out the elements that apply to your particular situation. Our explanations simply state what is R&D and what isn’t R&D, where necessary, under those labels. As, basically, that’s what you want to know.

You already have experience of HMRC regulations and you know that it is crucial to properly understand your entitlement. Not least because your accuracy is demanded by HMRC and there is always the nagging worry of being penalised for making a mistake at your end.

How this Guide to R&D Definitions helps you

This guide starts by defining each of these terms “with special meaning”. A mini glossary of some R&D specifics.

Once we have these building blocks, we can click them together to make the broader definitions of R&D for tax purposes. It saves you time trying to find this information elsewhere.

R&D Terminology: The Building Blocks

These are listed in alphabetical order, so you can skim to exactly what you need as fast as possible.

Appreciable Improvement

To make a scientific or technological characteristic better than its original form.

Is R&D

  • Something that a professional in the field would acknowledge as a considerable improvement.
  • You achieve the same end result by going an entirely different route to development.

Isn’t R&D

  • A tweak.
  • Predictable upgrade.
  • Something new to your company or field, but already exists as a standard elsewhere. Even with minor adjustments, this is just considered using existing knowledge in a new context.

Directly contribute

The things you do that are part of your investigation into solving the scientific or technological problem.

Is R&D

  • Anything you do to make changes to existing materials, equipment or software that is only for your R&D project.
  • Any new equipment, software or materials that you make solely for your R&D project.
  • Planning.
  • Design, testing and analysis.

Not R&D

Anything you do within the overall project that is not directly scientific or technologically based. Anything relating to you R&D work that is to do with:

  • Finance
  • Commercial aspects, like advertising
  • Production
  • Distribution
  • Administration
  • General support services, like security and cleaning
  • Non qualifying indirect activities, explained further down this list

Overall Knowledge or Capability

The existing, publicly available knowledge in the relevant scientific or technological field of your R&D project. The likelihood that the answer to your R&D question can be worked out from the existing information, by an expert in the field.

Your development will add the next level to this pool of knowledge and capability.

Is R&D

There is no current research available which contains the answer to your problem. A subject matter expert cannot work it out from the existing body of collective information and would need to carry out research in order to reach a conclusion.

You project will still be counted as R&D even if you are in the following circumstances:

  • Work has been done but is protected by the Trade Secrets Act, so information is not publicly available.
  • Many companies in the same sector are trying to create the same innovation at the same time. Each working on their own.
  • The advance you are striving for does exist, but it is not public knowledge.

Isn’t R&D

  • If your R&D ‘uncertainty’ can be resolved by reading information that is readily available, or an expert in the field can work it out without needing to do the research project, then it is not R&D.
  • Analysing, copying or adapting something to create a new innovation in your company that already exists does not add to this ‘overall knowledge or capacity’.

Project

Planned work aiming to achieve a scientific or technological advance. All the component activities should be within clearly defined boundaries.

Is R&D

  • Any and all sub-projects that are part of the work to resolve your identified uncertainty.

Isn’t R&D

  • For research and development projects that form part of a broader commercial project. Any other parts of the bigger project that are not directly working towards answering your R&D uncertainty are not R&D.

Science

The study of the physical and material universe – what it is and how it works.

Is R&D

  • Anything involving the nature and behaviour of our physical world.

Isn’t R&D

  • Social sciences, like economics.
  • Work in the fields of the humanities or the arts.
  • Purely mathematical advances.

System uncertainty

Scientific or technological uncertainty about how a system works together, rather than focus on one of its component parts.

Is R&D

  • Aim to resolve an issue with the complexity of a system.
  • Includes when an expert is unable to deduce how component parts or systems fit together for your specific purpose, even if the concepts of their integration are known.

Isn’t R&D

  • Using an established pattern or routine method to assemble component parts.

Technology

Using the defined meaning of ‘science’ in this R&D context, ‘technology’ is the practical use of scientific principles and knowledge.

Qualifying Indirect Activity

An R&D project will include different types of work, which is referred to as ‘activities’ throughout the R&D regulations. Some of this work is at the centre of answering the question you are investigating. These are the most straightforward elements to identify as being R&D. Other parts of the work are further removed from this core purpose. Some of this type of work qualifies as R&D and some doesn’t. The work that can be included as R&D is called ‘qualifying indirect activities’ and must all be clearly done as part of the overall R&D project.

Is R&D

  • Scientific and technical information services.
  • Support services like security, administration, clerical, finance and personnel.
  • Other essentials, like leasing laboratories, maintaining R&D equipment, hiring and paying staff.
  • Staff training.
  • University research done by researchers and students.
  • Research into new scientific or technological testing, survey or sampling methods.
  • Feasibility studies to evidence direction of R&D project.

Not R&D

  • Anything else that is not included in the list above.

Fitting the blocks together: R&D for tax purposes meaning

R&D for tax purposes takes place when a project advances the field of science or technology by resolving a scientific or technological uncertainty.

Hopefully, this statement makes a lot more sense now you’ve broken it down into its individual words and phrases.

Key R&D factors

  • Work done directly towards finding the project’s resolution is classified as being R&D. As are a number of qualifying indirect activities.
  • The advancement in science or technology could be a process, material, device, product, service or knowledge that adds to the sum of overall knowledge and capability.
  • Your project does not have to be successful in order for it to count as R&D. You may not achieve the advance you were striving for, but your work is still valid as R&D for tax purposes. It is the intention of your work that is important – even if you abort the project entirely.
  • Many R&D projects lead to other interesting questions to investigate. These then become their own separate R&D project, after the initial work is completed.

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