What R&D activities are eligible for the RDTI?

What R&D qualifies for the RDTI?

Your business must be undertaking an eligible R&D activity to claim the RDTI. New guidance has been released on Inland Revenue’s website (March 2021) to help you understand what qualifies as eligible R&D for the purposes of claiming.

Here is an overview of the key definitions.

At a glance

A core R&D activity must:

Scientific and technological uncertainty

An R&D activity is eligible for the tax credit if its purpose is to resolve scientific or technological uncertainty.

Scientific or technological uncertainty is a gap in the available scientific or technological knowledge.

What is science?

Science is the systematic study of the nature and behaviour of the physical and material universe. Work in the arts, humanities and social sciences, including economics, is not science for the purpose of the RDTI. Mathematics is the language of all sciences and can be both a science and method of applying the science.

What is technology?

Technology is the practical application of scientific principles and knowledge, where ‘scientific’ is based on the definition of science above. Examples of technology include the application of:

• Physics in engineering, product development and manufacturing process improvement
• Chemistry and biology in medical or food industries
• Computer science in information technology including software development, software engineering and hardware development

Resolving scientific or technological uncertainty

Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not publicly available or deducible by a competent professional working in the field.

Scientific or technological uncertainty includes the following:

• A problem of a scientific or technological nature, whether an objective is scientifically or technologically possible or how it can be achieved.
• An uncertainty of a scientific or technological nature using the adaptation of knowledge or capability:
  — within the same field of science or technology; or
  — from another field of science or technology.

• Where limitations in the current state of technology hinder the development of a new or improved capability. 
• A technological constraint that needs to be overcome, uncertainty arising in relation to:
  — Whether the output will meet desired specifications such as response time, reliability or cost; or
  — How the desired specifications can be achieved amongst possible alternative methodologies or solutions.

• The use of known processes, technologies and methodologies where the result or outcome is unknown. 
• System uncertainty, wherein the components of a system and their interactions are known, but the outcome/result of the system cannot be deduced from the outset.
• Technological uncertainty may also arise where something has already been shown to be possible but needs further work to make the technology more cost-effective, reliable or reproducible.

Let’s consider some other situations when eligible ‘uncertainty’ may exist:

An uncertainty may be encountered during the course of ordinary work. For example, ordinary design and prototyping for the purpose of product development may encounter an unanticipated technological uncertainty. In this case, a systematic approach to resolve the identified technological uncertainty may be eligible, but the ordinary work that preceded this is not.

In product development, there will be times when a solution needs to meet commercial constraints. Commercial constraints do not themselves create scientific or technological uncertainty, but trying to meet them might. For example, commercial constraints may require that technologically uncertain paths be attempted, although proven alternatives exist.

Your R&D also doesn't have to be successful - even if resolving the scientific or technological uncertainty is not achieved or not fully realised, R&D may have still taken place and you could be eligible for the RDTI.

How do I demonstrate that scientific or technological uncertainty exists?

Your business needs to consider whether the knowledge required to resolve the uncertainty is publicly available, or deducible by a competent professional in the relevant field.

Let’s break this down:

• The ‘knowledge required to resolve the uncertainty’ essentially means the solution to the problem. If this knowledge is publicly available or deducible by a competent professional in the relevant field, then this is not an eligible scientific or technological uncertainty.
• ‍Publicly available knowledge that resolves the uncertainty is knowledge that is reasonably accessible. This may include knowledge published in professional journals, on the internet, or in published patents.
• ‘Reasonably accessible’ does not mean the knowledge must be available for free. Knowledge that is reasonably accessible on commercial terms is considered publicly available. Some knowledge may not be reasonably accessible through commercial means. For example, knowledge may be disclosed in a granted patent, but cannot be licenced from the patent owner on reasonable terms.
• ‍Deducible by a competent professional in the relevant field. The ‘competent professional’ is a hypothetical person with ordinary knowledge and experience in the relevant scientific or technological field. The competent professional possesses relevant skills and experience and/or relevant qualifications, and understands common practices for solving common problems in the field.
  
  ‘Deducible by a competent professional’ means that a competent professional, faced with the scientific or technological uncertainty in question, could resolve the uncertainty without undertaking a systematic course of investigation. They do not have to be able to resolve the uncertainty off the top of their head, but can use their knowledge and abilities to resolve the uncertainty without undertaking a systematic course of investigation.
  
  Conversely, an uncertainty is considered not deducible by a competent professional if the competent professional would need to undertake a systematic course of investigation to resolve the uncertainty (having identified the scientific or technological uncertainty). The competent professional may be confident they can resolve the uncertainty, and may even see a number of options to do so, however the question is not one of confidence. The question is whether they can in fact resolve the uncertainty without undertaking a systematic course of investigation.
  

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Systematic approach

To be eligible for the RDTI a core R&D activity must also follow a systematic approach. A systematic approach involves a planned, logical investigation to solve the problem (for example through testing, experimentation or prototyping).  A systematic approach can be flexible and adaptive, changing in response to results, but the approach remains logical and focused on solving the problem.

Random or unplanned trial and error is not a systematic approach, regardless of whether this produced something useful.

An accidental discovery is not disqualified from meeting this test provided it was produced while undertaking a systematic approach.

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Purpose of creating new knowledge, or new or improved processes, services, or goods

To be eligible for the RDTI your business needs to identify ‘why’ you are undertaking your R&D activities.

Your R&D must have a material (important or significant) purpose of seeking to create new knowledge, or to create new or improved processes, services or goods.

New or improved processes, services or goods are created when something is changed or adapted to the point where it is ‘better’ than the original.

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Supporting activities

You can also include activities performed in support of your core activities in your claim. To be eligible, a supporting activity must:

• support the core R&D activity as its only or main purpose, and
• be required for, and integral to, the core R&D activity.

Supporting activities can be performed before, during, or after a core activity. However, if you perform a supporting activity before you start a core activity, and don't end up doing the core activity, you can't claim the credit for your supporting activity.

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Ineligible activities

A number of activities are excluded as core R&D, but may be eligible as supporting activities:

• Research in social science, arts, or humanities
• Quality control, routine testing, routine collection of information and routine operations on data
• Reverse engineering a commercial product or process from an existing product or system or from plans, blueprints, detailed specifications, or publicly available information
• Data mapping and data migration testing
• Bug testing, beta testing, system requirement testing, user acceptance testing, and data integrity testing
• Minor adaptions, cosmetic or stylistic changes or improvements, including to software
• Testing or comparing the efficiency of algorithms already known to work
• Testing security protocols or arrangements
• Converting existing systems to, or integrating existing systems with, new software platforms.  

The following are excluded as both core and supporting activities:

• Pre-production activities, including demonstration of commercial viability and tooling up
• Routine de-bugging of existing computer software
• Supporting or making minor improvements to existing computer software, using known methods
• Routine software and computer maintenance
• Prospecting for, exploring for, or drilling for minerals, petroleum, natural gas, or geothermal energy
• Market research, market testing, market development, or sales promotion, including consumer surveys
• Commercial, legal, or administrative aspects of patenting, licensing, or similar activities
• Activities involved in complying with statutory requirements or standards for pre-existing processes, services, or goods
• Management studies
• Activities relating to organisational design
• Ineligible internal software development.

Activities are excluded for several reasons, including:

• to clarify that the activity does not amount to R&D because the knowledge required is publicly available or can be deduced by a competent professional,
• to clarify that it does not amount to R&D because it occurs before any scientific or technological uncertainty is identified or after it has been resolved, or because there are inadequate spill-over benefits from the activity.

Refer to the detailed RDTI guide (page 51) for more information on excluded activities.

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