What is research and development?
Introduction – What is research and development?
For me, the R&D process is very much divided in to two.
Firstly, one must identify that there is qualifying R&D project. This, I suppose, is a technical matter.
Secondly, one must then identify the expenditure in relation to the project and what expenditure qualifies.
In some businesses, the same person will assist with this – in others, there will be a technical lead in charge of the R&D itself and perhaps a finance team detailing the items of expenditure.
The first point is that it has a specific meaning. It does not necessarily mean what the man or woman on the bus might think.
For these purposes, it is a term of art.
It is firstly defined in the statute and “means activities that fall to be treated as research and development in accordance with generally accepted accounting practice”
We’ll turn to what that means in a minute.
Next, we also exclude anything that relates to oil and gas exploration or appraisal.
Then, we are also moderated by the BEIS Guidelines. These provide a more practical guide to what is R&D.
It is a requirement that the activities are R&D for the purposes of GAAP under:
- FRS102 for the UK; or
- IAS38 as the international standard
For both, we have the accounting definitions as follows:
- Research is the planned and original investigation… with the prospect of gaining new scientific or technical knowledge and understanding;
- Development is the use of research or knowledge to a plan or design for the production of new stuff
The R&D guidelines – What is research and development?
The R&D guidelines add some more meet to the bones and, I suppose, restrict the definition.
There are specific guidelines for pharma and software – which are worth looking at if you have clients in these areas.
We also have HMRC’s guidance in the Corporate Intangibles Manual.
Finally, what we must remember is that we are interested in whether a project qualifies for R&D. We aren’t looking at the business as a whole, just whether a specific project qualifies for R&D.
What is a qualifying project?
This is defined at para 19 of the BEIS guidelines.
“Activities conducted to a method or plan in order to achieve an advance in science or technology”
So there needs to be a plan. We’re not talking about luck, stumbling across across something by chance. So it is good practice to get your clients in to the habit of putting in place a proper project plan at the outset (albeit, this is not always possible.)
Further, we need an advance – and that advance must be achieved in science or technology.
A seminal case (which was actually a negligence case) asserts that being ‘cutting edge’ or ‘innovative’ is not what is being looked at. Although the product in question was a computer game with a cutting-edge game engine – it was not an advance in science or technology.
When does a project start and end?
A project starts when:
- ‘uncertainty’ in a project is identified’; and
- Work begins to resolve that uncertainty
So again, hopefully you can see how it is helpful to instil discipline for the purposes of R&D.
When does the project end? A project ends when the uncertainty is resolved – for example, where the project results in a resolution then this might be in the form of a prototype or, say, in a research paper.
The project does not have to be successful. A project that is abandoned can also qualify. Clearly, abandoning that project will bring the project to a close.
What is research and development? – Activities
Only two types of activity qualify for relief:
- Activities that directly contribute to resolving the uncertainty – and we have some examples there;
- Qualifying indirect activities – commonly, we have admin and support services that are related to the R&D
What is science and technology?
The next piece in the jigsaw is what is science and technology? No real surprise here, I guess.
For science, we will be looking at studies that fall in the traditional scientific fields which are chemistry, biology, engineering, physics etc. It excludes social sciences, arts and humanities.
Technology is about applying those scientific studies in a practical manner. So perhaps, turning a research project into a drug.
Remember, we are looking at the project and not the science. So an art gallery could devise and build an API that links two pieces of software together and this would qualify for relief.
What is an advance?
It is important that there is an advance and that advance must be appreciable.
The advance must be an advance in the overall field of science and / or technology.
So, for instance, if such an advance has already been achieved by others then this will not qualify – unless it is, itself, an appreciable improvement or it’s use has somehow been adapted.
Further, advance is further restricted by the fact that it cannot be readily deducible to someone who is a competent professional.
If one Company has developed something which they have protected the IP religiously then another firm developing the same will not be prevented from getting the relief as long as an advance ignoring the trade secret.
What is uncertainty?
In terms of uncertainly, of course, you can have different types of uncertainty.
Firstly, can something be done?
Secondly, how can it be done?
Thirdly, for example, could the same thing be achieved in a cheaper, more efficient fashion. And this is a good area for R&D claims – eg where processes are being made more efficient.
Video blogs on this topic
- Does your work qualify for research and development tax relief?
- Does my company qualify for research and development tax credits?
- How to make a claim for research and development tax credits
- How much can I claim?
- What is ‘qualifying expenditure’?
- Why do so many companies not claim Research and Development relief?
Detailed articles on this topic
- R&D Signpost
- What is research and development?
- R&D tax reliefs
- SME tax relief
- R&D qualifying expenditure
- Research & Development Expenditure Credit (“RDEC”)
- State aid and research and development tax relief – How do the two affect each other?
- HMRC Update – R&D Tax Relief & COVID-19
- Can R&D tax relief help your clients’ in the Coronavirus crisis?
If you have any queries regarding what is research and development, or R&D in general, then please get in touch.