R&D stands for Research and Development. Research and development means the discovery and creation of new knowledge to uncover and enable the development of new products, processes, and services, or the improvement of existing ones.
What is R&D in business?
In business, R&D is the first stage of the development of a potential new product or service. Businesses will research their target market and their customer needs and pain points to develop new and improved products and services, with an end goal of successfully bringing them to market.
R&D is important for businesses to remain competitive, and of course, increase profit, but it often brings risk due to the uncertainty of the project. Businesses can’t be sure if their goals are feasible and whether they’ll ultimately achieve their objectives with what they’re attempting.
What is R&D for tax purposes?
The UK government introduced the R&D Tax Credit scheme in 2000 to stimulate innovation in the UK economy. R&D tax credits are available to limited companies in the UK.
HMRC defines that Research and Development for tax purposes takes place when “a project seeks to achieve an advance in science or technology.” With this in mind, to get an indication of whether your project could qualify as R&D in the eyes of HMRC, we advise looking at the following three criteria in regards to your project:
- Is there a high degree of uncertainty? For your project to qualify, you will need to have tried to overcome some form of scientific or technological uncertainty (challenge). If the outcome of your project is a foregone conclusion, with success guaranteed, it is unlikely it will qualify. With uncertainty comes risk, so the good news is that it doesn’t matter if your R&D project is successful or not. What counts is that you tried to overcome this uncertainty. Only the costs incurred in the R&D project undertaken are taken into consideration, not the outcome of the project itself.
- Will it drive competitive innovation? Your R&D project should aim towards a genuine innovation that hasn’t been seen elsewhere. The new or modified product, service, or process should be an advance in its field.
- Does it require experienced professionals? The uncertainty (challenge) should not be easily worked out by a professional in the relevant field. Instead, they should require competent professionals, which indicates that the advance was challenging to achieve. A competent professional is one who is expected to be knowledgeable about the relevant scientific and technological principles involved, be aware of the current state of knowledge, and have accumulated experience and be recognised as having a successful track record. Simply having worked in a field or having an intelligent interest in it does not, by itself, make a person a competent professional.
Any project that’s involved substantial innovation should be eligible, as long as it is scientific and technical and not just an aesthetic or cosmetic enhancement. Read our full Eligibility Guide to learn more.
Which industries can claim R&D tax credits?
R&D tax credits are claimed by organisations across all sectors. Any organisation that seeks to research or develop an advance in their field can qualify, and claim on successful or unsuccessful projects. In 2017- 2018 £4.3bn was claimed in total. Most commonly, R&D tax credits are claimed by companies in software development, manufacturing, engineering, construction, and pharmaceuticals. Read our case studies to find out more about some of the claims we’ve supported for companies across a range of sectors.
When claiming R&D tax credits, there’s complexity as to what counts as R&D. If you think you might have a qualifying project but are unsure, get in touch with one of our team for a free eligibility assessment.