Defining qualifying R&D is not as simple as you may think, as while the Research and Development Expenditure Credit (RDEC) offers a valuable incentive for companies investing in innovation, accurately defining qualifying R&D activities is crucial for a successful claim. In this summary video and more detailed article, I look at the key principles you need to be aware of, as set out in UK government guidance and manuals.
Defining qualifying R&D for RDEC claims requires a nuanced understanding of the key principles set out in government guidance and manuals.
How to define the "Scientific or Technological Advance” the R&D project is seeking, as this can be quite subjective.
How to distinguish between genuine technological uncertainties that will support the need for R&D and routine problem-solving.
Where to set the boundaries of the R&D project within a wider commercial project.
Distinguishing what activities qualify, especially indirect qualifying activities.
Problems in accurately identifying and apportioning eligible R&D costs.
Not having robust evidence and records to draw on.
In this article we aim to address these issues.
It is important to grasp at the start that for UK R&D incentives, science is tightly defined as the physical sciences i.e. biology, chemistry and physics. Social sciences, the arts and economics are specifically excluded from the scope of R&D claims.
At the heart of RDEC eligibility lies the concept of "scientific or technological advance."
This requires demonstrating that the activities being claimed go beyond routine improvements. The project must encompass an aim to create new knowledge or capabilities in a field of science or technology, not merely an advancement in a commercial or administrative sense. This advance should extend the overall knowledge or capability in the field rather than just in the business itself, even if it remains a trade secret. For example, using existing techniques to reduce waste in a manufacturing process, is unlikely to qualify, but developing a new automated process to achieve waste reduction may well qualify.
Scientific or technological uncertainty is a fundamental concept underlying the definition of what constitutes R&D. It refers to situations where a competent professional cannot readily deduce whether a desired advance is achievable or how it can be achieved in practice. This uncertainty must be technical, not commercial. For instance, the uncertainty might relate to the feasibility of a new engineering system or the behaviour of a novel material under specific conditions. Addressing this uncertainty through systematic investigation is what defines R&D. If the solution is readily apparent to a specialist, it's unlikely to qualify.
Software development can qualify for RDEC, provided it seeks a scientific or technological advance. This often involves overcoming technical uncertainties in areas like algorithm development, data management, or system architecture. Routine software application development, updates or enhancements, are unlikely to qualify. The key is demonstrating that the project aimed to resolve technological uncertainty through innovative approaches.
Comprehensive documentation is essential for supporting an RDEC claim. This should include detailed records of:
The industry knowledge and capability at the start of the project.
The advance being sought within a project.
The scientific or technological uncertainties identified or encountered.
The steps taken to overcome those uncertainties.
The costs incurred directly related to the R&D activities.
The R&D project timeline (as distinct from any wider commercial project).
Maintaining detailed project diaries, technical reports and cost spreadsheets is vital. This documentation should clearly articulate the technical challenges and the innovative solutions that were worked on.
Several common misconceptions can lead to inaccurate RDEC claims. One is believing that any innovative activity qualifies. R&D must involve a genuine attempt to achieve a scientific or technological advance in a qualifying field of science or in technology. Another misconception is that only large-scale projects qualify. Even smaller projects can be eligible if they meet the criteria. Furthermore, many businesses believe that if a project fails to achieve its intended outcome, it cannot be claimed. Failure does not disqualify a project, provided a genuine attempt was made to resolve uncertainties. Finally, many believe that back office or commercial tasks can be included as qualifying expenditure which is incorrect. Only the cost of direct scientific and technological work and some linked supporting activities can be claimed.
By understanding these foundational principles and maintaining thorough documentation, you can effectively navigate the RDEC landscape and make the most of the R&D incentives, available to all UK registered companies.