Navigating the R&D tax relief maze
So you've joined the growing number of engineering businesses keen to make the most of the Government’s generous R&D tax relief scheme. Congratulations! You’re potentially on your way to securing thousands of pounds for your company, but there are one or two things you should know first.
What you need to know when applying for R&D tax relief
HMRC’s guidelines for what constitutes R&D are certainly extensive, but they’re not always clear! It can take a fair bit of time, not to mention head-scratching, to pick your way through the terminology and understand exactly how HMRC defines R&D.
Technological uncertainty vs technological unknown
One thing HMRC is clear about is that companies must be trying to achieve their goals by resolving ‘technological uncertainties’ within specific projects. So what’s meant by ‘uncertainty’? Well, in the eyes of HMRC, there is a vast difference between technical uncertainties and technical unknowns. Technical unknowns on their own don’t count as eligible R&D, which only kicks in when technical uncertainties arise. The distinction between the two essentially comes down to whether or not a problem can be readily resolved by a competent professional. If it can, then it isn’t a technological uncertainty. R&D only begins when conventional knowledge has been applied and exhausted, without a resolution to the problem.
Automotive R&D claim example
An automotive engineering company aims to develop an improved transmission system for use in commercial transit vans. It procures three transmission systems produced by competitors and tests each to qualify the performance. Although the performance of each transmission system is unknown, it is possible to carry out the tests using conventional methods. This data may provide engineers with a clear idea on how to develop an improved transmission system. In this case, the unknown has been resolved (ie the performance of the competitors’ systems) and, as established methods were used, this doesn't constitute R&D. However, if, once the unknowns have been resolved, it’s still unclear how the engineers will develop a more efficient transmission system, then this becomes a technical uncertainty and R&D begins!
R& D Claim - Trial and error
Another minefield on the fine line between eligible and ineligible R&D is trial and error! If you think of trial and error as experimentation using routine methods, then when it’s used to remove unknowns that precede R&D it’s ineligible, but if it’s used to resolve technical uncertainties that form part of R&D then it is eligible.
Engineering firm R&D claim example
If an engineering firm is using trial and error to establish the best tooling material for a given application, this wouldn’t be considered eligible R&D. Why? Because the company knows that with this trial it will find the best material for its purpose. If, instead, a company uses trial and error to determine how different parameters affect fundamental material properties, and this knowledge hasn’t been documented in the open domain, then this is R&D. Why? Because in the second example, trial and error is being used to generate new knowledge.
R& D Claim - Process improvement
Advancements in a company’s processes only qualify as eligible R&D if they’re geared towards advancing science and technology, not simply increasing profits.
Factory R&D claim example
If a factory installs new machines to improve production processes, but is then forced to carry out major adaptations to resolve technological uncertainties before this improvement can be seen, then this is eligible R&D. However, if process improvement is carried out purely for commercial gain – such as improving the processes using standard methods with a view to increasing production rates – then it doesn't count as R&D.
Slippery stuff, and this is just the tip of the iceberg when it comes to the many specific definitions of eligibility on HMRC’s website. No wonder companies find applying for R&D tax relief on their own quite so daunting and confusing. As the UK’s leading technical R&D tax relief specialist, Jumpstart provides a host of engineering companies with a welcome hand in securing R&D tax relief. All on a no-win, no-fee basis!
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