Why the strongest R&D claims start with uncertainty
“We’re not particularly innovative here, we just solve problems”.
That’s the most common response I hear from businesses considering a future R&D tax claim. Ironically, it is one of the strongest indicators that a company may be undertaking R&D. The reason is simple: when it comes to R&D tax in the UK, innovation is not a requirement.
Uncertainty is.
And this leads to one of the many hidden pitfalls in claiming.
This misunderstanding can easily lead to a badly presented project, and potentially a months-long period of wrangling with HMRC to explain the project again and again. Ultimately, especially in the current climate of increased scrutiny, it can lead to the disallowing of what could have been a qualifying project, with potentially hundreds of thousands or millions of pounds on the line.
All because many professionals, engineers, project managers, directors, technicians, accountants and even some R&D tax consultants focus on one word: innovation, rather than another: uncertainty.
Usually, this comes from businesses thinking about R&D in commercial terms – the novelty of their invention, the market disruption, the value created, and often, from a pre-conceived notion of what “R&D” is, or at least, what work “should” qualify.
And that is not an unreasonable starting point; the R&D tax incentives scheme in the UK is intended to help drive innovation in UK companies. But it does more than this, and it does it in a roundabout way. Indirectly.
The scheme functions by moving away from the hard-to-define, subjective discussion about what is “innovative” and what isn’t – and instead looking at projects through the (slightly less subjective) lens of scientific or technological uncertainty.
In my years as an adviser, I have seen many novel projects that do not meet the specific, statutory definition of R&D for tax purposes (given in the DSIT Guidelines), either because of the field they are in, or the nature of the challenges faced. And, conversely, there have been a few that do meet the definition despite appearing on the face of it, to be much less disruptive.
But, although many people focus on finding the novel aspects of a project as the starting point for an R&D claim, it is worth noting that the word “innovation” is used only once in the entire statutory definition of R&D, and even then, it is mentioned almost in passing. “Uncertain” and “uncertainty” are used almost 60 times.
And still, when submitting R&D claims, so many companies continue to frame their projects as innovative, groundbreaking, novel or disruptive, rather than directly addressing the core requirements: did the project seek an advance relative to the baseline capability? Did the project face uncertainty of a scientific or technological nature?
Under this definition, it is perfectly possible for a project to have sought something new (an advance) but to have involved no technological uncertainty. Meaning you can have an advance, that technically has no qualifying activities – and therefore no cost to claim.
For example, a recent prospect, the Director of a major construction firm, described a new project management platform they have built over several years and at great expense. The new system is undoubtedly powerful and goes beyond any commercially available software product in the construction field by drawing on multiple data streams to simplify project delivery and provide new insights.
It is innovative, novel and certainty commercially valuable. But, although the challenge was significant, and the development was labour intensive, it was not uncertain to the software developers who built the platform. That is, it took time for the construction engineers to educate the developers on how the construction industry operates and what data is relevant, but once the developers understood what was needed, there was little uncertainty in how to go about building it.
The construction platform project was time consuming and the product was innovative, but there was no uncertainty in how to develop it from a software engineering perspective.
It would have been easy for an inexperienced firm to either
- conclude that their project must surely qualify – because it was innovative – potentially ending up spending months in enquiry with HMRC for submitting a non-qualifying project, or
- (ii) exclude the project entirely because their developers could not identify an uncertainty.
Digging deeper, we did identify uncertainties – on the construction side rather than the software side, in terms of building new data streams for the platform inputs and analysing trends from the platform outputs. So, a day or so spent getting more familiar with each layer of the project brought significant project spend into scope for the R&D claim.
An experienced claimant, or a good R&D tax advisor will therefore make sure to spend 5, 10, 30 minutes, or as long as it takes at the start of an interview making a few core distinctions absolutely clear:
- the need to pivot our thinking from commercial novelty to scientific and technological uncertainty,
- the difference between a time-consuming, laborious and complex project, and one that faces genuine uncertainty in whether it is possible or how to achieve it in practice.,
- the difference between a product being new to market versus representing an advance in the field.
These, and other easily misunderstood concepts stem directly from business’ focus on commercial and market innovation and HMRC’s focus on the core statutory definition of R&D for tax purposes, as well as the guidance provided in their internal CIRD manual and GFC3 communications to claimants.
That’s why we sit with clients to go through these distinctions before considering whether a project should form part of their claim. There are two objectives: to ensure only robust, defensible projects are submitted, while helping project leaders to find qualifying activities they haven’t considered.
This often involves education workshops either remotely or on-site to help technical staff to see projects through a new lens: shifting away (for a short time only) from looking at the projects in terms of commercial value, novelty, marketability or business efficiency, back to the fundamental question – does the project meet the definition of R&D for tax purposes?
That shift in perspective is often where the most valuable conversations begin.
That is how we have maintained an exceptional record of compliance through what has been a turbulent time in R&D tax. The approach we take both to technical submissions and record-keeping means we are confident we are at the absolute forefront of R&D tax compliance, without overburdening our clients with endless checklists that take them away from serving their own customers. We’ll come back to these themes in future articles.
We want our clients to be innovative, and we love hearing about their successes in the workshop and in the marketplace.
By all means, tell HMRC about your innovative approach to your industry. Put it in the introduction to the claim report. That’s where you’ll tell them about your business, the great work it does, the commercial driver for your project and the value it creates. But in evaluating projects themselves, HMRC isn’t testing for innovation, they are testing for uncertainty.
So, when it comes to describing the project detail, keep to the technical work and the three pillars of a successful claim: Advance, Uncertainty and Baseline Knowledge. Remember – in this one area of R&D, uncertainty beats innovation.