For the purposes of the RDTI, there is a specific statutory definition of ‘R&D’ which is not the same as the commercial, engineering or accounting definitions. The tax credit is not just for scientific research but also for development activity that meets the eligibility criteria. There are clear criteria around what does and doesn’t qualify as eligible R&D for claiming the RDTI and these should be considered in detail before launching a project.
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.
A core R&D activity must:
An R&D activity is eligible for the tax credit if its purpose is to resolve scientific or technological uncertainty.
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.
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:
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:
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.
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.
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.
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.
You can also include activities performed in support of your core activities in your claim. To be eligible, a supporting activity must:
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.
A number of activities are excluded as core R&D, but may be eligible as supporting activities:
The following are excluded as both core and supporting activities:
Activities are excluded for several reasons, including:
Refer to the detailed RDTI guide (page 51) for more information on excluded activities.