Tool A – How to show the project is R&D within the tax definition

The definition of R&D for tax purposes is set out at section 837A Income and Corporation Taxes Act 1988 and then in detail in the DTI's guidelines on the meaning of R&D for tax purposes which can be found at CIRD81900.

The guidelines state that R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities that directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D; other activities are not.

The guidelines go on to define 'project', 'advance in science or technology', 'science', 'technology', 'directly contribute' and 'scientific or technological uncertainty'. It's important to understand these concepts before attempting to reach a view on whether your company has an R&D project for tax purposes.

Once you have this understanding, it can help to consider, and answer, the following questions. You might even find that it's helpful to present these questions, with your own answers, when filing your tax return so HMRC can see your consideration of how the definition of R&D applies to your projects.

1. What was the scientific or technological advance?

Rather than stating the name of the product, process, functionality etc. being developed you should consider what scientific or technological advance is being sought. This focuses attention on the project's aim for an advance from the outset, which is the key issue in judging whether R&D for tax purposes is being undertaken.

Science does not include work in the arts, humanities and social sciences (including economics).

Claims have been erroneously made in respect of innovative business products or services that do not incorporate any advance in science or technology. It is not enough that a product is commercially innovative.

2. What were the scientific or technological uncertainties involved in the project?

Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field.

But uncertainties that can be resolved through relatively brief discussions with peers are routine uncertainties rather than technological uncertainties. Technical problems that have been overcome in previous projects on similar systems are not likely to be technological uncertainties.

Set out at a high level, in a form understandable to the layman, what these uncertainties were and when they started and ended.

3. How and when were the uncertainties actually overcome?

Describe the methods adopted to overcome the uncertainties and the investigations and analysis undertaken. This should not be in great detail, simply sufficient to show that the matter was not straightforward. Describe the successes and failures and the impact of these on the overall project. If the uncertainties were not overcome, explain what happened.

4. Why was the knowledge being sought not readily deducible by a competent professional?

It might be the case that it's publicly known that others have attempted to resolve the uncertainties and failed, or perhaps that others have resolved the uncertainties but that precisely how it was done is not in the public domain. In either case a valid technological uncertainty can still exist.

Alternatively, if the project is one where there is little public information available, the company will need to show that the persons leading the R&D for the company are themselves competent professionals working in the relevant field. This might be done by outlining the R&D leaders' relevant background, professional qualifications and recent experience. Then have them explain why they consider the uncertainties are scientific or technological uncertainties rather than routine uncertainties.

Whichever is appropriate, set out the details and have evidence available if needed.