Demonstrating a project qualifies is one of the trickiest aspects of claiming R&D Tax Credits or Tax Relief. The “rules” on qualification are the same for both SMEs and Large Companies. They are contained in a statutory instrument called “BIS Guidelines (formerly DTI Guidelines) (2004)” and the latest version updated in 2023 can be found here. Any company making an R&D claim should have thoroughly worked through these Guidelines to establish qualification.
This blog will look at one aspect of qualification the Advance in science or technology. A problem exists across the Guidelines in that while some matters are quite clear, others are open to a degree of interpretation. This can be a source of disagreement, error, and confusion. A good consultant will stick closely to the HMRC interpretation unless they believe that interpretation clearly departs from the legislation. Ultimately, it is the legislation that matters most but the HMRC view also matters in terms of successfully navigating an HMRC Enquiry into an R&D claim. If a company does not “like” (in the sense that they believe it goes against the legislation) an HMRC Enquiry decision they can appeal and ultimate go to a tax tribunal or even the courts. But this can be an uncertain, time consuming, and expensive process especially if the error is not clear cut and a matter of opinion. It is best for all involved in R&D claims to make well reasoned decisions based on the Guidelines and take all possible steps to get things right.
It is useful to look at the 5 questions on the advance that HMRC are asking in this standard template opening enquiry letter. I am going to assume that if a company has got this far that the Guidelines have been read and will restrict my comments to the 5 questions “Your response must include:” for each and every project.
What the gap in technological knowledge or capability was which necessitated the commencement of the R&D.
The Guidelines do not use the word “gap”. But that does not make this an unfair question. If you are seeking an advance then logically the advance has to be from a point where something is lacking and this could be described as a gap. I recently bought a new (used) car. I did not buy electric. This was because despite recent advances an electric car still lacks the range of a diesel car and is still a lot slower to refuel/power. Most electric car R&D in recent years has been about reducing that gap and progress has been made. If you were being more specific this gap could be described in terms of lightweight battery capacity, and battery charging technology. The aim of R&D in broad terms should be to produce something that on a technical level is “better” than existing products. Neither battery storage or charging are far enough along to make an electric car as performant as a diesel car yet on the criteria that matter to many consumers. It is becoming increasingly important in R&D claims to show external to the company opinion to support the advance and where the advance is being sought from. With cars this is relatively easy but with other technologies less clear and more debateable.
The baseline in science or technology that the advance is being measured against.
It seems to me that the “gap” in knowledge or capability is from the baseline to the advance. The baseline is the established state of knowledge or capability in science or technology. Again the Guidelines do not use the term “baseline” but it can be deduced that the baseline is being talked about in the section on “Overall knowledge and Capability” in Paragraphs 20-22.
To return to our electric car example the baseline would be the capability of light weight (Small and light enough to be practical in a car) to hold a charge which generates the range, and the existing speed these batteries could be charged at. An advance which as a minimum must be an appreciable improvement would be developing a suitable battery to hold a greater charge therefore range and a second advance would be charging more rapidly than existing chargers the baseline.
What scientific or technological advance is being sought or achieved during the development project not just your company's knowledge or capability alone.
This question very much resides in paragraph 6 of the Guidelines. This is one of the “stickier” parts of the Guidelines. For many reasons but because paragraph 11 allows R&D where someone else has achieved an advance but it is a trade secret and paragraph 21 makes some similar points including ” it is known that a particular advance in science or technology has been achieved, but the details of how are not readily available.” relating to overall knowledge and capability. You reach the somewhat circular position that a circumstance can exist where a company appears to advance its knowledge alone because the advance has already been achieved. But it is in fact advancing overall knowledge because of these caveats (P11 and P21) therefore it is not alone. But this can be quite hard to establish as no global register exists of what are trade secrets or not. It is also not clear how many companies have to of achieved something for it not to be R&D anymore and just a “backwards” non leading edge company catching up? These are just ambiguities in the Guidelines which suggest they need a rework. But something better might not be easy to produce.
The electric car example is easy and simplistic. But clearly a better battery than any on the market and charging system would be an advance in overall electric car technology, even if it was limited to one car manufacturer through patents etc, because those cars would have better range and charging. This knowledge would seep out eventually as patents are pretty ineffective and almost supply a blueprint in some examples of how something has been achieved long before it reaches the market. I think pre R&D market research is really important in establishing what has or has not been achieved in a field of science or technology. Some company leadership will just know this before embarking on a project, but I would suggest that documenting this is really important in effectively answering these first three questions and describing the advance. Market research information about competitor products, and even academic papers can be useful outside the company information when explaining the advance is not theirs alone. Having mentioned market research I feel obligated to make it clear this is not claimable as an R&D cost as it comes before R&D commences.
How this R&D project is new, or an appreciable improvement to the field of technology relative to what is available in the public domain and not readily deducible by competent professional.
This question invokes paragraph 20 another key paragraph. But it does raise a few concerns. To me these questions get quite repetitive which I think can be disconcerting. If you have described the gap, the baseline, and described the advance. Three ways to look at the same thing is a fourth way particularly helpful? Secondly, to the non professional this is getting quite jargon heavy. Gap and baseline could be seen as simplifying but this question brings in a number of Guideline only concepts.
To answer this question you need to show the competent professional is qualified and experienced in the field by supplying CV type information. You also have to provide that market research/overview type information best taken at the project onset to show the state of technology you were trying to advance from. One problem with this assessment is that HMRC may be looking at this online at Enquiry years after the initial assessment was made. So you need to be aware of that and hold the assessment to the project timeline not the present. Also paragraph 21 does allow for others to be doing the same or similar R&D and “it is known that a particular advance in science or technology has been achieved, but the details of how are not readily available.” HMRC do increasing paraphrase the tough bits of the Guidelines but ignore the more helpful bits.
To return to electric cars. We would need to provide information about the information in the public domain, and information about our technical leads to show they are competent. The advance should already be clear from the three previous questions but we should repeat it here.
If any patents were filed against the advance in the field of science or technology. If none were filed, please explain why you decided not to protect your intellectual property.
This standard question in my view is unfair on several levels.
- The Guidelines make no mention of patents as being a qualifying condition. Claims should only be judged on the Guidelines from a legal perspective. The question has no relevance to legal qualification.
- SMEs in particular struggle in cost terms to gain and enforce patents. One client was told by a patent lawyer that his advance was patentable but as it involved software and engineering would be easy to copy with minor changes making a patent hard to enforce. The patent would act as a blueprint to copy and flag up his innovation to those seeking to copy it. He sensibly did not seek a patent. To make a big issues of patents is very discriminatory against SME R&D claims. Large companies can afford lawyers and patent enforcement while small ones cannot.
- Even the Governments own website for patent applications states “Getting a patent is complicated – you are unlikely to get a patent without professional help and it can take several years.”. This does not suit many SMEs as a reasonable use of their time. I would suggest that if the Government does feel patents are an important aspect of R&D that they could simplify the process and provide SMEs with funding to gain patents.
Back to Electric cars. Well obviously this is a large company claim by a car company. They have deep pockets and a legal department so patents are not a problem. But in my view it is unfair to harshly judge an SME who ultimately probably cannot afford to enforce a patent for not having one. It is a question that discriminates against SMEs.
I would add for completeness that costs relating to patent applications are not claimable in an R&D claim. A patent is about legal protection of R&D not doing R&D.
Conclusion.
It is really important to read the Guidelines as a whole. Where words have special meaning apply them and where they don't take them literally. If everyone did this and claimed reasonably the UK R&D scheme would work well.
Interpretation is difficult as everyone looking at a claim will have some degree of bias. The part of the Guidelines that actually help on interpretation and can be incredibly helpful in understanding them and taking a view on interpretations are the examples at the end of the Guidelines. I would urge anyone facing an enquiry and unsure on the interpretation of the Guidelines to look at these. I have seen Inspectors make statements in enquiry letters that the examples clearly refute.
It is hard to say claiming is easy given the recent uptick in time consuming enquiries. It really is essential to put time and effort into a claim and think deeply about the Guidelines. It is important to try and distance yourself from the claim and think “does this look reasonable as R&D?”. If after you have done that you think you are right to claim do so. But in the knowledge that HMRC may try and rough you up at enquiry. Claiming is not for the feint hearted. Especially as a further recent HMRC change has been to start Enquiries several months after payment unlike in the past when checks were made before payment.
Personally, I believe supporting SME claims is important to the UK economy. If you wish to discuss a claim or an enquiry contact us today.
Christopher Toms – Compliance Director RandDtax.