Finance · 15 October 2015

Details on R&D tax credits: What constitutes R&D and what assistance can small businesses get?

Businesses must prove a technical feat has been achieved
Businesses must prove a technical feat has been achieved

The R&D tax credits scheme is a tax break that the government has had in place for over ten years (though the rules are constantly evolving). The objective is to use tax incentives to encourage technical firms to invest in developing their own innovative products, and make the UK more competitive on the global scene.

You can claim 15-33 per cent of money spent on research and development back and using a specialist company like GrantTree means that you can maximise your claim costs while minimising the chances of an HMRC enquiry.

What constitutes R&D is a constantly-evolving plethora of HMRC legislation, defined in detail in the CIRD – or what we affectionately call in GrantTree “the Bible of tax credits”. HMRC defines research and development as a project or product which “solves technical uncertainty”, a phrase laden with governmental ambiguity.

It’s very difficult to ascertain whether your project qualifies. If the project had a certain outcome, it’s probably not R&D. If the outcome was uncertain only because of your own lack of experience in the field, or for commercial reasons, then that’s still not R&D. The project should be uncertain because of technical reasons.

It’s very difficult to pin down even this first point. What you should do is to ask yourself: were there any aspects to the project where you weren’t sure if that component could be built to the required specification (requirements, performance, scalability, etc), or you weren’t sure what it might look like once built, because the technical constraints were unclear and had to be explored?

If the answer is yes, you may have an R&D project there and can claim 15-33 per cent of your development costs back.

If your project achieved a technical feat that no other project has achieved, then it is likely to be R&D. If it achieved something which few others have achieved, and if the knowledge of how they did it is not commonplace knowledge that the mythical “competent professional” would be aware of, then it could still be R&D. On the other hand, if what you’ve done has been done a thousand times already and is common knowledge, then it’s probably not R&D.

Cost is not an explicit criteria in the HMRC guidelines, but we find it helps to ferret out qualifying projects. Typically, something that cost £3,000 isn’t likely to be qualifying. On the other hand, if you spend £100,000 or more on competent software developers to build it, then chances are there was some technical uncertainty involved, because people don’t spend that kind of money to get something off the shelf.

That said, cost is not always a decisive factor. There are many companies that pay developers/founders almost nothing (or, in some cases, exactly nothing), but are still performing qualifying R&D. So again, no specific clarity comes from this factor.

This is a rough outline of the criteria, but ultimately, a final answer should be obtained from someone who knows these criteria inside out and deals with HMRC on a regular basis. Most specialist firms will tell you whether your project qualifies free of charge, so it’s definitely worth having a chat even if you plan to file by yourself. That can be us or somebody else, but the point is, it’s free, so you might as well take advantage of it.

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ABOUT THE EXPERT

Daniel Tenner is a serial entrepreneur and, most recently, the founder of GrantTree – a business established chiefly to assist others with funding requirements. From both tax schemes like R&D tax credits to UK government schemes such as InnovateUK’s Smart Grants, and EU schemes like Horizon 2020.

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