Clarifying Technological Advances for R&D Tax Claims
Can I claim R&D tax credits if existing technology was used?
Do we need to invent something completely unique to claim R&D tax credits?
What if our R&D project failed or is unsuccessful?
At R&D Tax North West we are often asked questions from businesses seeking to clarify whether their R&D activities could be eligible for a helpful reduction in their company tax bill.
Understandably, there are a number of misconceptions over which projects qualify for R&D claims. The R&D tax guidance states that ‘activities which directly contribute to achieving an advance in science or technology……..are R&D’. Certain qualifying indirect activities are also R&D. This leaves many businesses making the assumption that their projects do not qualify.
This is especially true of businesses that use existing technology in an attempt to solve a problem. Does using and adapting existing technology disqualify them from R&D tax claims?
Consider this example:
Illustrative Example for R&D Tax Claim Project
At R&D Tax North West, we have used our experience in R&D claim support to devise a hypothetical situation that illustrates how a project may qualify as R&D. Therefore, it’s important to note that whilst the following illustration draws on our experience it does not represent any specific claims. Indeed, the solution may already have been developed and available in the public domain.
Facing a New Issue or Potential Solution:
Let’s say a business had devised and installed a particular piece of electronic equipment at a remote location. However, this business now required engineers to locate the equipment as well as access its controls remotely.
The problem now exists where there is a need for reliable location tracking and data communication link technology. However, the communications and power infrastructure where the equipment is located is under-developed, or possibly non-existent.
This raises a number of issues including a need to address key functional characteristics including; low power consumption; long transmitter range and small overall package size.
To address these issues, the company examines potential solutions. Could they use conventional telemetry with a dedicated power source? Perhaps solar, wind or RFID (radio frequency identification). As none of these options provide a clear path to success, each must be considered as to suitability, including reliability, cost effectiveness, repeatability etc.
Although these options may all be technically feasible, they may not be the best solution based on the key performance criteria. Therefore, continuing to develop an improved, advanced solution is still considered as R&D.
Discovering a scientific or technological uncertainty for R&D:
The company now appreciates that the solution to the problem is uncertain. There is technology that exists that meets some criteria, but nothing that provides an overall solution to the issue.
Could they then adapt existing technology to remotely access equipment in a location with a limited communications or power infrastructure?
The company would need to consider technological uncertainties that might include:
- The level of device miniaturisation that can meet requirements but is still able to deliver effective transmitter range or battery life.
- The size of data stream that can be sustained.
- Sampling rates and data granularity – will an RFID or GPRS connection be able to make remote changes? Is available data sufficient for maintenance analysis?
Attempting to Solve Technological Uncertainties with R&D
To devise a solution, the company first developed a short-range prototype and associated HMI (human machine interface) software.
The underlying principles used to develop the short-range device could then be applied to an extended-range prototype device.
Extensive trials were carried out to demonstrate reliability before the final product could be completed. This took 5 iterations of development, during which 3 prototypes were manufactured and developed.
In parallel to the hardware development, the software was also developed for use with the HMI and multiple operating platforms. There were a number of beta releases before the final stable version was achieved.
Activities that Qualify for an R&D Claim:
At the start of the project, there were a number of uncertainties for which the company did not have solutions for, nor that existed in the public domain. This required the adaptation of existing technology to achieve functional performance.
To achieve a resolution to the uncertainties raised, the company expended time in direct engineering and project management; which of course qualified as R&D.
The time used in the project included research, design time, prototype manufacture and testing activities. The cost of this time spent would then form the basis of an eligible R&D claim and includes salaries, Employers NI and pension costs. There are also other related costs that can be included (such as material costs associated with manufacture of prototypes). However, these should only be included if identified as qualifying by a professional R&D tax service,1 such as R&D Tax North West Ltd.
Making an R&D Tax Claim for Technological Advances
As you can see from the above hypothetical R&D tax claim example, existing technology was used to solve a problem.
The R&D tax claim would have been successful because the solution to the issue was not certain, no off-the-shelf product existed to meet company needs and it required some risk for the business to pursue the solution. This would have been the same even if the project was ultimately unsuccessful. It is the attempt rather than the outcome that is important.
However, despite many companies carrying out eligible R&D work, misunderstandings regarding qualifying R&D activities and costs can cause businesses to under claim or, worse, fail to recognise that they could be eligible for relief.
That’s why here at R&D Tax North West, we are more than happy to support your business in getting the most from your R&D tax claims, by helping you understand whether the work you do could be eligible and then to assess your qualifying costs prior to submitting a successful claim.
So, if you’ve recently used existing technology to solve a problem, we’d love to hear about it and help you achieve a substantial reduction for your company tax bill – call Nick on 01827 338118 or fill out this quick reply form.