Innovation takes place in many forms within businesses across the UK, and the same eligibility applies across industries for the R&D tax credits. Whether you’ve developed software for pharma, adapted a food product, or improved the safety of a textile process, for example, you could retrieve a cash injection from the government, helping to take your innovation further. Businesses involved in research and development (R&D) can receive a hugely beneficial boost from the R&D tax relief. As part of the claiming process, you’ll need to document all R&D endeavours, both indirect and direct ones, with the costs for all of them. In this article, we will outline what qualifies as R&D activities to help you gauge whether you have an R&D tax credit claim to be made so you can proceed to the next steps.
What qualifies as R&D activities?
Great ideas take time and investment to come to life. R&D encompasses a number of experimental and investigative activities that collectively create new knowledge, technologies, products, or processes that advance a company’s or industry’s capabilities. These activities involve exploration, testing, and refinement to drive progress and stay at the forefront of knowledge and capability. Some of these activities are the main business operations that they complete day in, day out. But for other businesses, their R&D may be a side project which is why many of these businesses are surprised they are eligible for R&D tax credits. As part of your R&D tax credit claim, you can claim the costs for the activities involved in the actual testing whether your project was a success but also for the less glamorous aspects of the project such as the essential administrative tasks that take place in the background.
What are qualifying direct R&D activities?
These are known as core activities. Essentially, it’s any activity that is directly related to resolving scientific or technological uncertainties. These activities are typically characterised by hands-on scientific, technological, or experimental work aimed at advancing knowledge and innovation. Scientists, researchers, engineers, and technicians directly engaged in the creation and advancement of new products or processes typically undertake these activities.
Direct R&D activities examples
- Experimental research: Conducting experiments to test hypotheses, explore new concepts, or validate theories.
- Prototype development: Building and testing prototypes of new products or processes.
- Innovation in design: Applying creative and innovative approaches to the design of new technologies or solutions.
- Data analysis: Analysing data collected through experiments or studies to draw meaningful conclusions and insights.
- Technology development: Developing and refining new technologies with the goal of creating more advanced and efficient products or processes.
- Scientific research: Conducting scientific investigations to expand understanding and knowledge in specific fields.
- Engineering development: Applying engineering principles to develop and improve products, systems, or processes.
What are qualifying indirect R&D activities?
Indirect activities do not directly contribute to the resolution of the R&D project of advancing past scientific or technological uncertainty. They provide the key support to the project, facilitating the necessary conditions to facilitate the project.
Qualifying R&D indirect activities include essential ancillary tasks integral to R&D initiatives, such as hiring and compensating staff, leasing laboratories, and maintaining research equipment, including R&D-purpose computers. Additionally, activities like training supporting specific R&D projects, research conducted by students and researchers at universities, exploration of new testing or survey methods, and feasibility studies guiding the strategic direction of R&D efforts are considered eligible indirect activities.
Indirect R&D activities examples
- Ancillary operations: Tasks essential to R&D, such as hiring and compensating staff, leasing laboratories, and maintaining research equipment, including computers used for R&D purposes.
- Training: Training programs designed to directly support R&D projects, ensuring that personnel have the necessary skills and knowledge.
- University research: Research activities conducted by students and researchers at universities that contribute to or support specific R&D projects.
- Feasibility studies: Studies conducted to inform the strategic direction of a particular R&D activity, assessing the viability and potential outcomes before committing to full-scale development.
A snapshot of eligible R&D projects
It is crucial to identify the projects that can engage businesses in research and development (R&D) initiatives to capitalise on R&D tax relief. If the technical team encounters difficulties in overcoming technical hurdles, devising solutions, or expressing concerns about technical uncertainties, the projects are likely eligible to make an R&D claim for their qualifying costs.
List of eligible R&D projects
We have gathered a list of qualifying R&D projects to help you understand the scope of research and development activities. However, please note that the list is not exhaustive, and owing to the unique dynamics within each industry, projects may exhibit variations based on the specific nature and scope of the work involved.
Products and Processes
- Processes reengineering to enhance efficiency in operations
- Designing and developing new innovative products
- Designing cost-effective and innovative operational processes
- Designing, developing, and testing product prototypes
- Development of improved or efficient products
- Advanced product development using computer-aided design (CAD) tools
- Development of unique computer numerical control programs and programmable logic controllers
- Designing and developing innovative manufacturing equipment
- Prototyping and three-dimensional solid modelling
- New techniques or integration of new materials to improve product performance and manufacturing processes
Software or Applications
- Tailored software or applications to run new computer hardware
- Tailored software to run on devices with pre-installed operating systems, such as GPS, mobile phones, and tablets
- New or advanced methods of capturing, transmitting, manipulating, and protecting data
- Software or applications to cater for the needs of new projects
- Tools to extend the functionality of application software programs or of an operating system
- Extensions to database software, programming languages, or operating systems
- Software development tools, such as data across platforms, image processing or character recognition
- Advanced data management techniques, such as new object representations and new data structures
What activities do not qualify for R&D?
As part of your R&D tax credit claim, you can only include costs for eligible R&D activities, both direct and indirect. The concept of the tax incentive is to encourage innovation and advancement across all sectors, so the government only rewards legitimate research and development. Including the cost of an ineligible R&D activity could provoke a time-consuming compliance check delaying the payout of your R&D reward. Here are examples of common activities that are often wrongly assumed to count as R&D in HMRC’s eyes:
Making incremental adjustments to existing technologies without innovation
As part of R&D eligibility, the advancement you make can’t be easily solved by a competent professional in your field. It needs to be something new, something that involves creative thinking and a sense of risk. Making basic adjustments or adaptations to existing technologies or products, without a substantial element of technical uncertainty or innovation, generally does not qualify as R&D. True R&D involves pushing beyond current technological boundaries.
Aesthetics
This could be creating branding for your new software or any changes to the appearance of a product unrelated to its capabilities and performance. Activities solely focused on aesthetics, typically do not meet the criteria for Research and Development (R&D). To qualify for R&D, the work should involve addressing scientific or technological uncertainties and contributing to the advancement or creation of innovative products or processes, rather than aesthetic enhancements.
Routine testing and quality control
Engaging in routine testing or quality control measures, while important for ensuring product reliability, doesn't qualify as R&D unless it involves overcoming scientific or technological uncertainties, as opposed to standard, well-established procedures.
Market research and commercial analysis
Conducting market research and commercial analysis, although crucial for business strategy, does not fall under R&D unless it involves the resolution of scientific or technological uncertainties directly related to the development of new products or processes. Simply studying market trends or consumer preferences without a scientific or technological focus typically does not meet the criteria for R&D tax incentives.
Production and distribution
Engaging in routine production and distribution activities, although essential for business operations, generally does not qualify as Research and Development (R&D). Essentially, these activities focus on the systematic resolution of scientific or technological uncertainties to create innovative products or processes, distinct from the day-to-day functions of production and distribution.
Routine data collection and analysis
Gathering and analysing data through routine methods, without the aim of resolving scientific or technological uncertainties, is not considered R&D.
Lots of these examples are routine tasks that don’t have a focus on solving technical or scientific uncertainty. Wondering how to ascertain if your projects qualify as R&D activities? Look no further—explore the four-part test that assists you in determining whether your activities meet the criteria for R&D tax credit relief.
Takeaways
To create a successful R&D claim and ensure you don’t miss out on anything you’re eligible for, it’s vital to understand the differences between indirect and direct R&D activities. Equipped with this understanding, businesses can navigate the claiming process more effectively, ensuring that only legitimate R&D efforts are considered for tax incentives. This guide provides a comprehensive understanding of qualifying Research and Development (R&D) activities, emphasising their pivotal role in fostering innovation across diverse industries in the UK.
How can we assist you in this regard?
Making an R&D claim can be challenging, especially given the broad horizons of research and development. If you’re uncertain about eligibility for your R&D activities, Alexander Clifford is here to offer expert support. Our team has secured millions of tax credits for our clients who are taking huge steps in their industries to bring productive change and reformation. Each of our technical and R&D tax advisors is trained to a high level to create confident claims and our in-house processes reflect the up-to-date changes to the R&D scheme. Open to discussing how our support benefits you? Reach out to us today to see if you are eligible to turn your R&D initiatives into a financial boost for your business.
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