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Does my project qualify?
For a project to qualify, it must meet the following conditions:
- The project must seek to make an advance in a field of science or technology,
- Attempt to resolve scientific or technological uncertainties
However, it is worth noting that the government’s definition of R&D is purposefully broad.
For a project to qualify as R&D, you should have set out to achieve an advance. That advance must be in the field of science or technology, not just in your company’s own knowledge. Your project can still be R&D if the advance has already been achieved but the details are not readily available because, for example, they’re a trade secret.
You could be undertaking qualifying R&D activities while you were:
- Creating new products, processes or services.
- Changing or modifying an existing product, process or service to make it better.
In its most simplest and common form, R&D can take place where an appreciable improvement, has been made through technological changes which makes something better in a measurable and objective way. (Think faster, lighter, more durable, cheaper, greener etc)
If you were not sure your project was scientifically or technologically possible from the outset, or a competent professional in the field didn't know how to achieve it in practice, you could have been resolving uncertainties and therefore would qualify for R&D tax relief
It is also important to be aware of the current state of technology as a benchmark for your advance sought, or the typical industry standards, to show how you have improved on the available technology and standards.
Can I include dividends?
Eligible Employee costs include:
- Annual salary
- Employer's National insurance contributions
- Employer's Pension contributions
- Reimbursed Expenses (i.e not purchased through company credit card)
Some of my employees were furloughed during the Covid-19 Pandemic
If you made a claim through the Coronavirus Job Retention Scheme (CJRS), this could impact the R&D claim.
Employee costs paid while employees were on furlough cannot be included in your R&D tax relief claim. Furloughed employees could not do any work for you therefore they cannot be considered to be engaged in R&D activity.
From 1 July 2020, flexibly-furloughed employees who were allowed to work part-time would still be considered to be sub-sided by the CJRS, therefore the costs relating to their furloughed time should be excluded from your employees costs calculations.
Please speak to us if this case applies to you.
What is R&D apportionment?
The R&D apportionment is the percentage of time each of your employees spent on R&D activities. If you keep records such as time sheets, you can use them to work out a more accurate percentage.
However HMRC recognise that many companies don't rigorously track staff time. That's okay especially if it's your first claim. Just use your best judgement and knowledge of your team to assign an estimated R&D apportionment.
Going forward it is advisable to implement good record-keeping practices for R&D using an appropriate real-time approach that best suits your business.
How much time and percentage is reasonable?
R&D apportionment can depend on the type of work each employees undertakes and the nature of their role. You should think about how much of their time is spent on R&D verus the routine aspects of their role or how involved they are in your general commercial activity.
Developers and engineers engaged mostly in R&D activity could warrant an acceptable R&D apportionment of 50-90%.
Developers and engineers working mostly in system maintenance and routine bug fixing, faults or minor tweaks would have a lower or zero R&D apportionment.
5-10% can be a reasonable apportionment for admin, finance and other staff that support the R&D project.
Don't forget to count directors' time spent on planning, managing employees working on R&D, and supervising the R&D project too.
Practically speaking no employee can be spending 100% of their time resolving uncertainty on a project, as there would naturally be some routine aspects which are not qualifying activities
When does R&D start and Finish?
R&D begins when work to resolve the scientific or technological uncertainties starts and ends when the work to resolve the uncertainty ceases to take place
The projects will generally go through the following stages:
- Discovery and feasibility
- Concept and design
- Prototype and testing
What are eligible R&D activities?
You can claim for time spent on the following Direct & In-direct qualifying activities:
Technical Feasibility (Direct)
- Consulting with experienced staff or external consultants
- Carrying out feasibility studies to inform the direction of R&D
- Gathering technical information
- Defining technical feasibility
- Predicting and preparing for technical issues
- Identifying, analysing and classifying issues
- Internet research
- Research of peer studies
- Material research and selection
- Allocating and managing resources
- Project managing technical aspects of the project
Concept and Design (Direct)
- Proof of concept
- Technical design and analysis of ideas
- Modelling design eg. CAD build
- Creating software specifically to help solve a technical problem
Prototype and testing stage (Direct)
- Prototype / Alpha or Beta copy (By the R&D team, developers, engineers, scientists, testers
- Further prototype builds to overcome faults or create further advances
- Field trials, tests and analysis e.g. testing in real environment or simulation
- Building and testing prototypes of the intended product
- Building and testing software iterations of the intended product
- Building and testing pilot plants or hardware
- Performing experiments
- Designing and running trials
- Carrying out other design, testing and analysis required to overcome technical difficulties
Other supporting activities (In-direct)
- Producing documentation or other reports related to the R&D
- Maintaining facilities where the work took place
- Providing IT support for computers used during the work
- Providing security for facilities where work took place
- Carrying out administration, finance, HR activities related to the work
- Time spent hiring staff essential to the R&D projects
- Inducting staff onto projects
- Training staff, to enable them to participate in the project
- Keeping records of experiments and tests
What activities don't qualify?
- Using search engines to find and review information online
- Carrying out market research
- Organising funding for the work and preparing budgets
- Arranging commercial terms with suppliers
- Undertaking artistic, cosmetic or aesthetic design
- Fine-tuning and optimising after core technical concepts have been proven
- Bug-fixing, where bugs were easily traceable and resolvable
- Registering patents
- Carrying out financial and commercial steps related to the technology
- Any routine activities
What about design and front-end stuff? Are they eligible R&D activities?
Generally any design and front-end work that create visual and aesthetic appeal, or enhance the user experience without pushing technological boundaries DO NOT qualify as eligible R&D activity.
Only design work that is essential to the resolution of the technical uncertainty of the project can be claimed for. A technical uncertainty exists when you are trying to develop a certain functionality, capability or advance that isn't readily known and available to professionals in the field, or is a public secret.
For example if a technical t-shirt is too scratchy, resolving this design issue may involve researching and developing different weave structures of the materials involved.
Usually UX/UI design work doesn't involve technical uncertainties.
What do you mean by competent professional?
A competent professional is someone in your business who has notable experience, skills or qualifications relevant to the field of science or technology in which the advance took place.
For a manufacturing business this could be an engineer, and for a software project this could be a developer. A competent professional would be best placed to assess how technically challenging your project was and how difficult the uncertainties were to resolve, even as experts in the field the solution would not have been clear, known or apparent to them, without undertaking R&D.
What should I include in the bios
HMRC will want to see that the company's adequately experienced or qualified employees are facing and trying to resolve genuinely difficult technical problems,
Therefore please detail any qualifications, skills, awards and experience they have relevant to the work
Does the subcontractor have to be a UK resident?
No, However, the rules are due to change in April 2023, whereby R&D expenditure on contractors will be restricted to those based in the UK only.
What is a connected subcontractor?
This happens when an SME sub-contracts work to another SME with the same shareholder. It could be that one person has control of both companies, or one person and a person who is connected to them (i.e a relative) has control of the other.
"When you sub-contract elements of your R&D work, you can claim up to 65% of their eligible costs. But when you and the sub-contractor have the same shareholders (are connected parties) different rules apply, and you may be able to claim more or less that than 65%. "
Please speak to us if this case applies to you.
What are R&D consumables?
A consumable is something that is purchased and used to allow your R&D project to progress.
The most common types are, raw materials, chemicals, utilities and software licenses. For instance, if you require aluminium for testing and developing a prototype, this can be claimed for, as well as a software application that you needed to use to develop your technology.
The consumable item must be used up (fully or partially) during your R&D project. Items consumed in the R&D should not form part of a product that was then sold on.
What consumables can I include?
You can include:
- Any raw materials, such as steel, aluminium
- Electrical Components
- Software Licenses, such as CAD, MS Office (apportioned)
- Tablets & Smartphones used for testing
- Utilities - Gas, Electricity, Water
- Usually anything used to build Prototypes
Do NOT include:
- Office Supplies
- Monitoring & Domain Registration
- Payments/Shopping, Cart Accounts
- Marketing/UX Software
- Desktop Computers & Laptops
How much of the cost can I include?
You can include the full cost if the full item was used up, or you can use an apportionment.
For certain consumables, like materials and software licenses, you can edit the percentage allocation if the product was not solely used for the R&D project.
For utilities, please enter the full amount, the correct apportionment is then calculated according to the information you provide on your employee's R&D allocation.
Can I group many invoices of one consumable into one entry?
Can I include consumables have been capitalised?
Generally No, all consumable items included in the claim should be expensed to the profit and loss account for the period of the claim
Please speak to us for further advise, if you need to
Some reasons why the knowledge being sought wasn't readily deducible by competent professionals
- The knowledge we needed was not easily accessible
- The knowledge needed was a protected trade secret
- Published knowledge (online or printed) was out of date or incomplete
- There were conflicting views amongst experts
- Data was lacking, incomplete or hard to interpret
- Existing knowledge was purely theoretical, with no practical precedent
- It was difficult to anticipate how different components or factors would interrelate
- The outcome of changing many variables at the same time was complex and unpredictable
If you have any questions further please speak to your Consultant or R&D Analyst. Their details can be found at the top under Company information.