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R&D Tax Credits: When Does A Project Begin?

You’re pretty sure you have an R&D project, with a clear scientific or technological advance. But when did it start? When does it end? And, most importantly, how much of the work can you claim for R&D tax credits?

Knowing the boundaries of a project will result in potentially increasing your claim value and, crucially, ensuring your claim is accurate and defensible in the event of an HMRC compliance check.

An R&D project involves planned activities to advance science or technology and includes all the activities that collectively resolve scientific or technological uncertainty. On this basis, an R&D project could include several different sub-projects.

At Tax Cloud, we’ve seen plenty of confusion about what R&D and commercial projects are. We’re here to clear up the confusion:

• A commercial project involves many tasks from conception to launch. This includes all administrative work, standard and innovative development, and commercialisation tasks.
• An R&D project involves work specifically to overcome scientific or technological uncertainty. It may be helpful to think of the R&D project as a sub-project within the commercial project.

For example:

Company A is a pharmaceutical development company working on a commercial project to develop a new cold and flu medication. The project includes market research, sourcing of active ingredients, development of excipients (non-active ingredients), packaging design, marketing, regulatory work, and any intellectual property work.

The R&D project is done to work out the feasibility of combining certain active ingredients without side effects.

Only the R&D project qualifies for tax relief, even if the wider commercial project is essential to the success of the R&D.

Project Boundaries

The R&D project includes only the activities that seek to resolve the uncertainty. HMRC expects to see clear boundaries for when R&D begins and ends and will request this information within the mandatory Additional Information Form.

Beginning of R&D

R&D begins when a scientific or technological uncertainty is identified. This usually follows the investigation period into the existing baseline of science and technology (i.e., after literature reviews, competitor analysis and research into the public domain). It is definitely after the commercial project has been given the green light and usually after the general project set-up.

Of course, identifying the uncertainties of a project will depend on the field and the individual project. A large commercial project may have multiple uncertainties appearing at different points, some even concurrently. A smaller commercial project may have a single uncertainty that reveals itself relatively early.

End of R&D

R&D ends when the scientific or technological uncertainty has been resolved. It may not be commercially perfect, with some bug fixes, aesthetic alterations or even additional modules to be completed, but the underlying feasibility has been proven. Any commercialisation or marketing work usually happens after the R&D project has ended.

Where projects are abandoned, the end of the project will be when the decision was made to no longer work on resolving the uncertainty.

In some cases, an R&D project may end, then begin anew once another uncertainty is shown.

Separating other non-R&D developments from qualifying work is crucial to identifying your R&D costs. HMRC expects you apportion your staff, contractor and externally provided workers to ensure you only include time spent on R&D.

Any apportionment methods must be made on a just and reasonable basis. This means the methods must reflect the activity, and the methods and workings should be recorded.

For example, an acceptable apportionment cost method for an R&D Manager may be the average percentage of time their direct R&D staff team members spend on qualifying activities.

The best option for apportioning time is always using contemporaneous timesheets. When you use Tax Cloud, you have access to our timesheet module, which allows you to accurately define how much time staff spent on R&D across the year without the guesswork.

When it comes to other cost categories (i.e., software licenses and consumable items), the methods of apportionment will vary. They will likely be based on the apportionments made for staff; for example, using the R&D staff time versus total staff time. This percentage can then be applied to office-wide costs, like heat and power, or to software licenses that are used by the entire company.

Still not sure on your project timelines or if your project is even eligible? Get in touch with the experts at Tax Cloud. We offer a free review of your projects to confirm eligibility and we’re always happy to talk about the nitty-gritty of R&D tax credits.